Debtholders' reaction to sustainability reporting regulations: International evidence

This study investigates the impact of mandatory sustainability reporting on the affected firms' debt financing costs. Leveraging sustainability disclosure regulations enacted in 36 jurisdictions from 1998 to 2022 and using a staggered difference-in-differences empirical approach, we find that the regulation adoption firms experience a reduction in the debt financing cost subsequent to the mandate. Channel tests reveal that the benefit of a lower cost of debt is driven by greater transparency on sustainable practices and improved sustainability performance, which lead to a lower level of default risk stemming from sustainability-related concerns. Cross-sectional analyses further indicate that the debt financing cost reduction effect is more pronounced if the sustainability reporting regulations are issued by a government institution, on a full compliance basis, and with stronger enforcement. Our results provide policymakers with further evidence on the ongoing discussion about the effectiveness of sustainability disclosure mandates.