ESG performance as an informational signal: dual effects on the cost of capital and price synchronicity

Abstract

This study examines how firms’ environmental, social, and governance (ESG) performance jointly affects the cost of capital and stock price synchronicity. Using firm-year data for companies listed on the Stock Exchange of Thailand (2015–2024). Fixed-effects and dynamic system GMM models linking overall and pillar-level ESG scores to the cost of debt, the cost of equity, the weighted average cost of capital, and the extent of firm-specific information in prices are estimated. The results show that stronger ESG performance lowers financing frictions–particularly in debt markets–and reduces synchronicity, indicating improved informational efficiency. A key insight concerns governance. Investors appear to interpret governance practices as broad signals of market credibility rather than as mechanisms that enhance firm-specific transparency, which limits governance’s ability to improve price informativeness. In contrast, the environmental and social pillars are the primary drivers of lower synchronicity. This study contributes to the ESG literature by providing evidence from Thailand that ESG transparency is financially material through both capital cost and information channels, suggesting that managers seeking to enhance price informativeness should prioritize substantive environmental and social disclosures along with formal governance practices.