Does ESG Disclosure Quality Reduce Firms’ Cost of Debt? The mediating Role of Information Asymmetry

Purpose: This study examines whether environmental, social, and governance (ESG) disclosure quality reduces firms’ cost of debt and whether information asymmetry mediates this relationship. Approach: The study uses panel data of 500 firms listed on the Pakistan Stock Exchange for the period 2016–2025. Cost of debt is measured as interest expense divided by average interest-bearing debt, ESG disclosure quality (EDQ) is measured through ESG disclosure scores, and information asymmetry is measured through Amihud illiquidity. Panel regression and mediation analysis are applied to test the proposed relationships. Findings: The results show that ESG disclosure quality has a significant negative effect on cost of debt, indicating that firms with stronger ESG transparency obtain debt financing at lower cost. Amihud illiquidity is positively associated with cost of debt, confirming that higher information asymmetry increases borrowing costs. The mediation results support partial mediation, suggesting that EDQ reduces cost of debt both directly and indirectly by lowering information asymmetry. Implications: This study contributes to ESG-finance literature by providing emerging-market evidence from Pakistan. It highlights ESG disclosure as a financially relevant transparency mechanism that improves the firm’s information environment and influences creditors’ debt pricing decisions.