ESG Performance, Debt Financing, and R&D Output: Evidence From the Healthcare Sector

Amid growing calls for sustainability in the healthcare sector, this study examines how and under what conditions environmental, social, and governance (ESG) performance influences research and development (R&D) output. Although existing studies suggest that ESG performance enhances R&D output, the financial mechanisms that enable or constrain this relationship remain underexplored. We address this gap by theorizing and testing the dual role of debt financing as both a mediator and a moderator in the ESG performance and R&D output relationship within the healthcare sector, where innovation is highly capital-intensive and socially consequential. Integrating stakeholder theory and agency theory, we argue that ESG performance promotes R&D output through improved access to reputational and financial resources, whereas high debt levels weaken this effect due to agency conflicts. Using panel data from 2016 to 2022 on healthcare firms in Europe and the United States, we estimate our main models using OLS and applying instrumental variable and system GMM techniques as robustness checks to address endogeneity. Our findings show that debt financing partially mediates the ESG–R&D link and negatively moderates it, revealing its ambivalent role. Compared to existing studies, our findings indicate that the effects of ESG performance on R&D output are conditional and context specific, with stronger impacts observed in Europe than in the United States, reflecting institutional conditions such as stricter European Union sustainability reporting frameworks, notably the Corporate Sustainability Reporting Directive (CSRD), along with robust policy incentives and longer term investment horizons. We also find pronounced effects in the biotechnology and pharmaceutical subsectors. This study contributes to theory by bridging competing views on ESG performance and offering a more nuanced understanding of how debt financing shapes the ESG–R&D output relationship.