Borrowing under ESG reputational risk: Evidence from convertible debt

Abstract

This paper examines how ESG reputational risk affects firms’ use of convertible debt financing. Using firm-level measures of ESG reputational risk derived from controversy-related news, we document that firms exposed to higher ESG risk rely significantly more on convertible debt. This relation is concentrated among firms facing higher borrowing costs and operating in environments characterized by limited corporate reputational capital, weaker institutional quality, and lower public awareness, consistent with a cost-of-debt substitution mechanism. Instrumental variable evidence based on press freedom and a quasi-natural experiment exploiting the Deepwater Horizon oil spill supports a causal interpretation. Our findings highlight security design as a key channel through which ESG reputational risk shapes corporate financing decisions.