Sustainability and ESG-Driven Capital Structure: Evolving Paradigms in Corporate Finance
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Oluseun PASEDA Department of Banking and Finance, University of Ibadan, Nigeria Babcock Business School, Babcock University, Nigeria
This study examines the influence of environmental, social, and governance (ESG) performance and sustainability governance on corporate capital structure decisions across developed and emerging markets. Drawing on a balanced panel of 2,000 publicly listed firms over the period 2000–2024, the research integrates traditional capital structure theories, trade-off, pecking order, agency, and market timing, with contemporary ESG paradigms. Using fixed effects, random effects, panel-corrected standard errors, and system GMM estimators, the findings reveal that ESG performance increases leverage and debt maturity while significantly reducing the cost of capital. Governance quality amplifies these effects, particularly in emerging markets where institutional enforcement mechanisms are less mature.
Robustness checks using alternative ESG metrics, subsample estimations, lagged specifications, and outlier exclusions confirm the stability of results. The evidence suggests that ESG and governance are structural determinants of financing strategy rather than peripheral sustainability attributes, effectively redefining traditional capital structure optimization under sustainability constraints. The study contributes to the development of ESG-integrated corporate finance models and offers policy-relevant insights for managers, investors, and regulators seeking to align financial architecture with long-term sustainability objectives.
Copyright© 2026 The Author(s). This article is distributed under the terms of the license CC-BY 4.0., which permits any further distribution in any medium, provided the original work is properly cited.
Article’s history: Received 25th of November, 2025; Revised 19th of January, 2026; Accepted 22nd of February, 2026; Available online: 15th of March, 2026. Published as article in the Volume XXI, Special Issue, 1(91), 2026.
Paseda, O., Abdulazeez, F., Oladimeji, J. A., Bababunmi, O., Owolabi, B., Arasi, T., Paseda, O. & Paseda-Oladoyinbo, F. (2026). Sustainability and ESG-Driven Capital Structure: Evolving Paradigms in Corporate Finance. Journal of Applied Economic Sciences, Volume XXI, Special Issue, 1(91), 177 – 202. https://doi.org/10.57017/jaes.v21.si.1(91).09
Acknowledgments/Funding: The authors acknowledge the helpful insights offered by colleagues during preliminary discussions on sustainability metrics and financing models. No external funding was received for this work. The authors also thank the editorial team and reviewers for the valuable comments that strengthened the manuscript.
Conflict of Interest Statement: The authors declare that no commercial or financial relationships exist that could be construed as a potential conflict of interest.
Data Availability Statement: The data that support the findings of this study were obtained from third-party databases, including Compustat Global, Refinitiv Eikon, Bloomberg Terminal, MSCI ESG Ratings, and World Bank World Development Indicators. These datasets are available from the respective providers subject to licensing restrictions. Data used in this study are available from the corresponding author upon reasonable request and with permission of the data providers.
Ethical Approval Statement: This study is based exclusively on the analysis of secondary financial and ESG data obtained from publicly available databases. It does not involve human participants, personal data, or animal subjects. Therefore, ethical approval was not required.
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