Journal of Applied Finance & Banking

ESG Performance and Bank Loan Interest Rates

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• Abstract

   

  This study investigates whether firms strategically enhance their Environmental, Social, and Governance (ESG) performance to obtain more favorable financing terms in the bank loan market. Building on the Resource-Based View and Legitimacy Theory, we argue that superior ESG performance serves as a non-financial signal of firm quality that strengthens stakeholder confidence, mitigates agency conflicts, and reduces information asymmetry between borrowers and lenders. These effects enhance banks’ assessments of firms’ creditworthiness and lower perceived default risk, thereby translating into more advantageous loan pricing. Using a panel of Taiwanese listed non-financial firms over the 2016–2023 period, we estimate multivariate regression models controlling for firm-specific characteristics, corporate governance attributes, and industry- and year-fixed effects. The results reveal a statistically and economically significant negative relation between ESG performance and loan interest rates, firms with stronger ESG profiles enjoy lower costs of bank borrowing. The evidence indicates that banks in Taiwan increasingly incorporate ESG considerations into their credit risk assessment frameworks and pricing mechanisms. This study contributes to the corporate finance literature by providing novel evidence that ESG engagement constitutes a strategic asset that enhances firms’ financing capacity and capital access, thereby linking sustainability performance to the cost of external debt financing.

   

  JEL classification numbers: Q50 M14 G21 E43.

  Keywords: ESG Performance, Bank Loan Interest Rates.