Moderating effect of firm size on the relationship between sustainability disclosures and cost of debt for listed non-financial firms in Kenya

Abstract

The growing emphasis on corporate sustainability disclosures coincided with rising concerns about debt financing costs in emerging markets. Therefore, this study examined the moderating effect of firm size on the relationship between sustainability disclosures and cost of debt for listed non-financial firms in Kenya. The research addressed a critical knowledge gap regarding the influence of environmental, social, and governance (ESG) reporting on borrowing costs in developing economies, where access to cost-effective financing remained a key business challenge. Grounded in stakeholder and agency theories, the research analyzed 38 non-financial corporations listed on the Nairobi Securities Exchange during the 2018-2022 fiscal years. Employing panel data methodologies, including random effects regression and moderation analysis, the findings demonstrated that environmental, social, and governance disclosures significantly reduced corporations' cost of debt. Significantly, corporate size strengthened these relationships, particularly for social disclosures and environmental disclosures indicating enhanced benefits for larger corporations. The results indicated that corporations could optimize their financing costs through robust sustainability reporting, while regulatory bodies needed to strengthen ESG reporting frameworks to enhance market efficiency. This research contributed to the expanding literature linking corporate sustainability practices to financial performance in emerging markets and offered strategic insights for corporations seeking to optimize their capital costs through enhanced ESG disclosures.