Do capital markets reward corporate climate change actions? Evidence from the cost of debt

Abstract

As a result of recurring natural disasters caused by climate change, firms are under enormous pressure to reconsider their environmental footprints. However, whether or not investors reward firms' climate change actions remains a topic of considerable debate. Using a sample of S&P 500 companies over the period 2005-2020, we hypothesise and find a significant negative relationship between climate change actions and the cost of debt, indicating that investors indeed reward corporate climate efforts in the form of lower cost funds. This relationship exists in both environmentally sensitive and non-sensitive industries and remains negative and statistically significant even after controlling for the impact of the ongoing pandemic . The findings are robust to the use of alternative measures for our variables, alternative estimation methods and after controlling for endogeneity issues. We interpret our findings within the decision-usefulness and stakeholder-agency theories that suggest that non-financial information on firms' environmental performance is becoming increasingly important when borrowers' creditworthiness is assessed. Our study offers important regulatory and academic policy implications.

A CEO's expertise power and bank diversification

“…Prior studies report different management behaviour during the 2007–2009 financial crisis (Ali et al, 2022). Similarly, Fernandes et al (2021) find that board governance and CEO power have negative association with bank risk‐taking during a financial crisis.…”

The board gender composition and cost of debt: Empirical evidence from Jordan

“…The explained variable in the aforementioned equation is the COD financing of non‐financial firms (Aksoy & Yilmaz, 2023; Ali et al, 2022; Palea & Drogo, 2020; Sánchez‐Ballesta & Yagüe, 2023; Usman et al, 2019), wherein the total interest expenses (financing) are divided by the average total debt. The financing interest expenses are considered an income statement item comprising interests and commissions related to the funds borrowed from commercial banks.…”

“…In addition, percentage of FDs to total board members were examined for robustness (Atif et al, 2020; Attah‐Boakye et al, 2020; Benjamin & Biswas, 2019; García & Herrero, 2021; Shatnawi et al, 2022). Both measures were employed by numerous past BGC studies by postulating that WOCBs would achieve a threshold for increasing board effectiveness (Ali et al, 2022; Karavitis et al, 2021; Pandey et al, 2020).…”

“…Resultantly, debtholders would willingly decrease the risk premium (Brown et al, 2011). Therefore, Board Gender Composition (BGC) is becoming increasing significance in evaluating borrowers' creditworthiness (Ali et al, 2022).…”

“…By considering additional influencing factors, we can effectively isolate the influence of gender diversity on debt costs, address potential biases, and derive more pre-Board attributesIncorporating governance-related control factors, like BS and BI, might aid in isolating the particular influence of BGC on COD. Thus, the current study isolated the influence of FDs on the COD by controlling governance mechanisms, which might impact the COD(Ali et al, 2022;Atif et al, 2020;Benjamin & Biswas, 2019;Karavitis et al, 2021;Pucheta-Martínez & Bel-Oms, 2019;Shatnawi et al, 2022), by including other board attributes, such as the board size (BS) and board independence (BI). The present study controlled the BS due to the relationship with the monitoring capacity of the board…”