Impact of carbon emissions on cost of debt-evidence from India

Abstract

Purpose The purpose of this paper is to analyze the relationship between carbon emissions and a firm’s cost of debt (COD) in the Indian context. Design/methodology/approach The present study is based on the Indian firms who disclose their emissions data under the Carbon Disclosure Project (CDP) during the period 2011 to 2014. The selection model is being used to remove the problem of endogeneity and sample selection bias. Further, the testing model is being used to examine the impact of carbon emissions on the COD. Findings The present study found that the coefficient of carbon emissions is positively and significantly associated with the COD. Moreover, the outcomes of the robustness test further show that the COD will be higher for polluting firms than environmentally friendly firms in India. Research limitations/implications The study has covered all the companies from India who are disclosing their emissions data under the CDP, London. The study will be most relevant for financial planning and capital structure design by the Indian companies. However, in designing the capital structure, the only COD is being covered in this study. Originality/value To the best of the author’s knowledge, the present study is a first of its kind to investigate the relationship between firms’ carbon emissions level and COD in the Indian context.

Mandatory disclosure, greenhouse gas emissions and the cost of equity capital: UK evidence of a U‐shaped relationship

“…For example, Maaloul (2018) indicate that GHG emissions increase firms' COC among a selected sample of Canadian companies. Similarly, Kumar and Firoz (2018) suggest that carbon emissions are positively and significantly associated with the cost of debt in India. These mixed results of examining the effect of GHG emissions on COC in various settings around the world motivated our objective to consider a U‐shaped relation between GHGD and COC in the United Kingdom, suggesting a negative association at low‐GHG emissions and a positive one at high‐GHG emissions.…”

“…Following prior GHGD‐to‐COC studies (e.g., Albarrak et al, 2019; Bui et al, 2020; Kumar & Firoz, 2018; Lemma et al, 2019; Maaloul, 2018; Raimo et al, 2020), we included a number of control variables. We control for the disclosure score of ESG practices (ESGScr) given the empirical evidence of its association with the COC (Plumlee, Brown, Hayes, & Marshall, 2015); Richardson & Welker, 2001.…”

“…Previous studies seem to have several shortages. First, a few recent studies focused on exploring the GHGD–COC nexus in the context of developed economies such as the United States (Albarrak et al, 2019) and Canada (Maaloul, 2018), whereas others investigated this association in developing settings such as China (Li et al, 2017), India (Kumar & Firoz, 2018) and South Africa (Lemma et al, 2019). On the other hand, a few studies examined the GHGD–COC nexus in the context of multiple countries (e.g., Bui et al, 2020; He, Tang, & Wang, 2013; Trinks, Ibikunle, Mulder, & Scholtens, 2017).…”

“…Third, a study examining the GHGD–COC nexus in the UK context is virtually nonexistent. Fourth, from a methodological perspective, all prior GHGD–COC studies have used the conventional linear regression methods, including the ordinary least squares (OLS) model (Albarrak et al, 2019; Kumar & Firoz, 2018; Li et al, 2017; Maaloul, 2018), the fixed‐effects regression model (Raimo et al, 2020; Trinks et al, 2017), the two‐stage least squares (2SLS) regression model (Bui et al, 2020) and the three‐stage least squares (3SLS) regressions (He et al, 2013; Lemma et al, 2019) (see Table 1). These traditional linear regression models summarise the average association between different dependent and independent variables on the basis of the conditional mean function E ( y | x ), which provides a partial understanding of the studied relations (Cobb‐Clark, Kassenboehmer, & Sinning, 2016).…”

“…Although prior researchers have recently sought to examine the impact of GHG emissions and/or disclosure on COC in various settings around the world (e.g., Albarrak et al, 2019; Bui et al, 2020; Kumar & Firoz, 2018; Lemma, Feedman, Mlilo, & Park, 2019; Maaloul, 2018), the expected effects of disseminating GHG information mandatorily on COC has not been examined, specifically in the UK settings (Alsaifi, Elnahass, & Salama, 2020). For instance, Albarrak et al (2019) indicate that the association between GHGD and COC is context specific, mainly associated with the regulatory environment.…”