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The impact of air pollution on the cost of debt financing: Evidence from the bond market

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  • Jianhua Tan
  • Kam C. Chan
  • Yining Chen

Abstract

This study investigates whether bond markets reflect firms' exposure to air pollution through an increased cost of debt financing; and, if so, whether firms can mitigate this air pollution penalty via effective governance and active monitoring. Using 1067 bonds issued by Chinese firms, we document a positive association between air pollution and the cost of debt financing, and this association is robust and economically meaningful. Specifically, with a one standard deviation increase in air pollution severity, a firm's bond yield spread increases approximately 16% relative to an average bond. Additional analysis suggests that credit risk and financial uncertainty are the transmission channels. Our results also confirm that strengthened corporate governance, active board and external monitoring, and a stabilized economic environment further enhance the impact of air pollution on a firm's cost of debt. Overall, air pollution has a material change in a firm's business strategy in using debt.

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  • Jianhua Tan & Kam C. Chan & Yining Chen, 2022. "The impact of air pollution on the cost of debt financing: Evidence from the bond market," Business Strategy and the Environment, Wiley Blackwell, vol. 31(1), pages 464-482, January.
    • Handle: RePEc:bla:bstrat:v:31:y:2022:i:1:p:464-482
    DOI: 10.1002/bse.2904
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    2. Guoxiang Li & Rong Zhang & Suling Feng & Yuqing Wang, 2022. "Digital finance and sustainable development: Evidence from environmental inequality in China," Business Strategy and the Environment, Wiley Blackwell, vol. 31(7), pages 3574-3594, November.
    3. Aiqun Wang & Ming Zhang & Shuya Zhou, 2022. "Air Pollution, Environmental Violation Risk, and the Cost of Debt: Evidence from China," IJERPH, MDPI, vol. 19(6), pages 1-23, March.
    4. Xin Han & Zheng Xuelian & Jun Hou & Xianming Kuang, 2023. "The Impact of Haze Pollution on Chinese Local Government Debt," SAGE Open, , vol. 13(4), pages 21582440231, October.
    5. Wu, Junfeng & Liu, Baohua & Chang, Samuel & Chan, Kam C., 2022. "Effects of air pollution on accounting conservatism," International Review of Financial Analysis, Elsevier, vol. 84(C).

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