Analysis of the Speed of Capital Structure Adjustment in Light of ESG Combined Performance and Corporate Reputation

Abstract

This study examines the relationship between the Speed of Adjustment (SOA) of Capital Structure and corporate reputation in publicly traded Brazilian companies, considering the ESG Combined Score (ESGC) and MERCO - Corporate Reputation Business Monitor ranking. The primary goal is to understand corporate reputation, and its relationship with SOA. We employed a partial adjustment model with panel data based on the dynamic Trade-Off theory, incorporating fixed effects and System GMM (Sys-GMM). The sample consists of 381 companies listed on B3 from 2013 to 2023, using data from Thomson Reuters and MERCO. The results indicate that ESGC companies adopt more conservative capital structures and exhibit a higher speed of adjustment. Corporate reputation positively impacts SOA, with MERCO listed companies showing a faster adjustment than others. . The nonlinear analysis revealed that, although the coefficients are small, ESGC has a marginally significant impact at extreme levels. Tangibility and profitability were significant for ESGC companies, while depreciation was significant for MERCO-listed companies and companies outside ESGC and MERCO. This study expands the understanding of the relationship between corporate reputation and SOA in emerging markets, highlighting its impact on capital structure. The findings may guide managers in developing sustainable financial policies and investors in using ESG as an indicator of financial stability and adjustment capacity. The inclusion of nonlinear analysis furthers the discussion on the complex impacts of ESG on corporate leverage.