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.