With capital markets’ growing attention to sustainable development, environmental, social, and governance (ESG) factors have become increasingly important in shaping corporate financing decisions. However, whether changes in ESG ratings (upgrades or downgrades) effectively signal shifts in a firm’s operational risk and transparency is unclear. Moreover, little research has explored whether these signals influence firm financing costs, particularly across ownership structures and regulatory environments. This study uses data from Shanghai and Shenzhen-listed firms from 2014 to 2023 to examine how dynamic ESG rating changes affect their debt financing costs and analyze the associated market responses. Across the full sample, ESG rating upgrades are associated with modest reductions in the debt financing costs, whereas downgrades raise debt financing costs, revealing an asymmetric pricing pattern in which creditors respond more strongly to negative ESG signals than to positive ones. Ownership structure moderates these effects, for non–state-owned enterprises, upgrades lower and downgrades increase debt financing costs more visibly than for state-owned enterprises. Following implementation of the new Securities Law, the impact of ESG rating changes on debt financing costs has become more pronounced. Robustness checks using alternative ESG providers and instrumental-variables estimation yield consistent results. These findings provide empirical insights for firms, investors, and policymakers to optimize financing strategies and improve ESG-related regulations.
Liu et al. (Thu,) studied this question.