The Transmission Mechanism of Borrowing Costs in the Relationship between Sustainable Debt Instruments and Corporate Valuation

Abstract

This study examines how sustainable debt instruments affect corporate valuation, specifically by evaluating borrowing costs as a mediating mechanism. Offering a distinct novelty, this research bridges existing empirical gaps by examining the comprehensive transmission mechanism of sustainable debt within the unique context of an emerging market. Theoretically, borrowing costs are expected to mediate this relationship because transparent sustainability commitments reduce information asymmetry, signaling lower risk to creditors and thereby lowering the overall cost of capital. The analysis focuses on public companies listed on the Indonesia Stock Exchange (IDX) during the 2021–2024 period. This study adopts a causal-associative quantitative design and applies purposive criteria to select a final sample of 46 companies. The analytical procedure employs panel data regression through directional hypothesis testing, supplemented by a Sobel mediation analysis to verify the transmission channel. Empirical findings indicate a direct increase in corporate valuation following the deployment of sustainable debt instruments. Furthermore, sustainable debt instruments successfully reduced borrowing costs, thereby indirectly stimulating further growth in overall corporate valuation. Consequently, this study confirms that borrowing costs serve as a partial mediator linking sustainable debt instruments with increased corporate valuation. These findings provide strategic implications for management to proactively optimize long-tenor sustainable instruments to achieve cost of capital efficiency. For investors, indicators of borrowing costs, ratings, and tenor can be integrated as criteria for assessing investment portfolios. Meanwhile, regulators are expected to provide economic and administrative incentives to accelerate the sustainable financial ecosystem in the capital market.