IDEAS home Printed from https://ideas.repec.org/a/eee/jiaata/v52y2023ics1061951823000423.html
   My bibliography  Save this article

Does cost of debt reflect the value of quality greenhouse gas emissions reduction efforts and disclosure?

Author

Listed:
  • Mahmoudian, Fereshteh
  • Yu, Dongning
  • Lu, Jing
  • Nazari, Jamal A.
  • Herremans, Irene M.

Abstract

Using a sample of North American companies reporting to the CDP (formerly Carbon Disclosure Project), we investigate whether details of companies’ carbon management practices reduce the cost of debt associated with greenhouse gas (GHG) emissions, with credit risk ratings as a proxy for cost of debt. Specifically, employing structural equation modeling (SEM) for the main analysis and three-stage least squares (3SLS) regression for further in-depth analysis, we simultaneously, yet separately, study the effect of detailed GHG emissions performance and assured GHG emissions disclosure on the cost of debt. Based on the theory of voluntary disclosure, our findings suggest that providing details about the implementation of many diverse GHG emissions reduction projects and assuring GHG emissions disclosure provides integrity to carbon management practices and, therefore, decreases cost of debt. Furthermore, we find that a reduced cost of debt assists companies to invest more in GHG reduction related projects. We recommend that further research considers aspects of voluntary disclosure that add to its integrity.

Suggested Citation

  • Mahmoudian, Fereshteh & Yu, Dongning & Lu, Jing & Nazari, Jamal A. & Herremans, Irene M., 2023. "Does cost of debt reflect the value of quality greenhouse gas emissions reduction efforts and disclosure?," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 52(C).
    • Handle: RePEc:eee:jiaata:v:52:y:2023:i:c:s1061951823000423
    DOI: 10.1016/j.intaccaudtax.2023.100563
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1061951823000423
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.intaccaudtax.2023.100563?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Bradley, Daniel & Pantzalis, Christos & Yuan, Xiaojing, 2016. "Policy risk, corporate political strategies, and the cost of debt," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 254-275.
    2. Piotr Tarka, 2018. "An overview of structural equation modeling: its beginnings, historical development, usefulness and controversies in the social sciences," Quality & Quantity: International Journal of Methodology, Springer, vol. 52(1), pages 313-354, January.
    3. Quick, Reiner & Inwinkl, P., 2020. "Assurance on CSR Reports: Impact on the Credibility Perceptions of Non-Financial Information by Bank Directors," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 124765, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    4. Kathleen Herbohn & Ru Gao & Peter Clarkson, 2019. "Evidence on Whether Banks Consider Carbon Risk in Their Lending Decisions," Journal of Business Ethics, Springer, vol. 158(1), pages 155-175, August.
    5. Mark P. Sharfman & Chitru S. Fernando, 2008. "Environmental risk management and the cost of capital," Strategic Management Journal, Wiley Blackwell, vol. 29(6), pages 569-592, June.
    6. Fan, Hanlu & Tang, Qingliang & Pan, Lipeng, 2021. "An international study of carbon information asymmetry and independent carbon assurance," The British Accounting Review, Elsevier, vol. 53(1).
    7. Robert H. Chenhall & David Smith, 2011. "A review of Australian management accounting research: 1980–2009," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 51(1), pages 173-206, March.
    8. Mahmoudian, Fereshteh & Lu, Jing & Yu, Dongning & Nazari, Jamal A. & Herremans, Irene M., 2021. "Inter-and intra-organizational stakeholder arrangements in carbon management accounting," The British Accounting Review, Elsevier, vol. 53(1).
    9. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    10. Busch, Timo & Hoffmann, Volker H., 2007. "Emerging carbon constraints for corporate risk management," Ecological Economics, Elsevier, vol. 62(3-4), pages 518-528, May.
    11. Amama Shaukat & Yan Qiu & Grzegorz Trojanowski, 2016. "Board Attributes, Corporate Social Responsibility Strategy, and Corporate Environmental and Social Performance," Journal of Business Ethics, Springer, vol. 135(3), pages 569-585, May.
    12. Warren Maroun, 2020. "A Conceptual Model for Understanding Corporate Social Responsibility Assurance Practice," Journal of Business Ethics, Springer, vol. 161(1), pages 187-209, January.
    13. Frank Hartmann & Paolo Perego & Anna Young, 2013. "Carbon Accounting: Challenges for Research in Management Control and Performance Measurement," Abacus, Accounting Foundation, University of Sydney, vol. 49(4), pages 539-563, December.
    14. Guangming Gong & Si Xu & Xun Gong, 2018. "On the Value of Corporate Social Responsibility Disclosure: An Empirical Investigation of Corporate Bond Issues in China," Journal of Business Ethics, Springer, vol. 150(1), pages 227-258, June.
    15. Haque, Faizul, 2017. "The effects of board characteristics and sustainable compensation policy on carbon performance of UK firms," The British Accounting Review, Elsevier, vol. 49(3), pages 347-364.
    16. Jing Lu & Irene M. Herremans, 2019. "Board gender diversity and environmental performance: An industries perspective," Business Strategy and the Environment, Wiley Blackwell, vol. 28(7), pages 1449-1464, November.
    17. Kleimeier, S. & Viehs, P.M., 2016. "Carbon disclosure, emission levels, and the cost of debt," Research Memorandum 003, Maastricht University, Graduate School of Business and Economics (GSBE).
    18. Christian Nitzl, 2016. "The use of partial least squares structural equation modelling (PLS-SEM) in management accounting research: Directions for future theory development," Journal of Accounting Literature, Emerald Group Publishing Limited, vol. 37(1), pages 19-35, October.
    19. Jing Lu & Dongning Yu & Fereshteh Mahmoudian & Jamal A. Nazari & Irene M. Herremans, 2021. "Board interlocks and greenhouse gas emissions," Business Strategy and the Environment, Wiley Blackwell, vol. 30(1), pages 92-108, January.
    20. Leuz, C & Verrecchia, RE, 2000. "The economic consequences of increased disclosure," Journal of Accounting Research, Wiley Blackwell, vol. 38, pages 91-124.
    21. Valta, Philip, 2012. "Competition and the cost of debt," Journal of Financial Economics, Elsevier, vol. 105(3), pages 661-682.
    22. Qingliang Tang & Le Luo, 2014. "Carbon Management Systems and Carbon Mitigation," Australian Accounting Review, CPA Australia, vol. 24(1), pages 84-98, March.
    23. Juhyun Jung & Kathleen Herbohn & Peter Clarkson, 2018. "Carbon Risk, Carbon Risk Awareness and the Cost of Debt Financing," Journal of Business Ethics, Springer, vol. 150(4), pages 1151-1171, July.
    24. Paul Ekins, 2010. "Eco-innovation for environmental sustainability: concepts, progress and policies," International Economics and Economic Policy, Springer, vol. 7(2), pages 267-290, August.
    25. Sung C. Bae & Kiyoung Chang & Ha-Chin Yi, 2018. "Corporate social responsibility, credit rating, and private debt contracting: new evidence from syndicated loan market," Review of Quantitative Finance and Accounting, Springer, vol. 50(1), pages 261-299, January.
    26. Ioannis Oikonomou & Chris Brooks & Stephen Pavelin, 2014. "The Effects of Corporate Social Performance on the Cost of Corporate Debt and Credit Ratings," The Financial Review, Eastern Finance Association, vol. 49(1), pages 49-75, February.
    27. Christy Glass & Alison Cook & Alicia R. Ingersoll, 2016. "Do Women Leaders Promote Sustainability? Analyzing the Effect of Corporate Governance Composition on Environmental Performance," Business Strategy and the Environment, Wiley Blackwell, vol. 25(7), pages 495-511, November.
    28. Yan-Leung Cheung & Weiqiang Tan & Wenming Wang, 2018. "National Stakeholder Orientation, Corporate Social Responsibility, and Bank Loan Cost," Journal of Business Ethics, Springer, vol. 150(2), pages 505-524, June.
    29. Pornsit Jiraporn & Napatsorn Jiraporn & Adisak Boeprasert & Kiyoung Chang, 2014. "Does Corporate Social Responsibility (CSR) Improve Credit Ratings? Evidence from Geographic Identification," Financial Management, Financial Management Association International, vol. 43(3), pages 505-531, September.
    30. Chenhall, Robert H., 2003. "Management control systems design within its organizational context: findings from contingency-based research and directions for the future," Accounting, Organizations and Society, Elsevier, vol. 28(2-3), pages 127-168.
    31. Faisal Faisal & Erika Dwi Andiningtyas & Tarmizi Achmad & Haryanto Haryanto & Wahyu Meiranto, 2018. "The content and determinants of greenhouse gas emission disclosure: Evidence from Indonesian companies," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 25(6), pages 1397-1406, November.
    32. Ragini Rina Datt & Le Luo & Qingliang Tang, 2019. "Corporate voluntary carbon disclosure strategy and carbon performance in the USA," Accounting Research Journal, Emerald Group Publishing Limited, vol. 32(3), pages 417-435, September.
    33. Borisova, Ginka & Fotak, Veljko & Holland, Kateryna & Megginson, William L., 2015. "Government ownership and the cost of debt: Evidence from government investments in publicly traded firms," Journal of Financial Economics, Elsevier, vol. 118(1), pages 168-191.
    34. Olaf Weber, 2012. "Environmental Credit Risk Management in Banks and Financial Service Institutions," Business Strategy and the Environment, Wiley Blackwell, vol. 21(4), pages 248-263, May.
    35. Kimitaka Nishitani & Katsuhiko Kokubu, 2012. "Why Does the Reduction of Greenhouse Gas Emissions Enhance Firm Value? The Case of Japanese Manufacturing Firms," Business Strategy and the Environment, Wiley Blackwell, vol. 21(8), pages 517-529, December.
    36. Luo, Le & Tang, Qingliang, 2014. "Does voluntary carbon disclosure reflect underlying carbon performance?," Journal of Contemporary Accounting and Economics, Elsevier, vol. 10(3), pages 191-205.
    37. Yongqing Li & Ian Eddie & Jinghui Liu, 2014. "Carbon emissions and the cost of capital: Australian evidence," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 13(4), pages 400-420, November.
    38. Richard Lambert & Christian Leuz & Robert E. Verrecchia, 2007. "Accounting Information, Disclosure, and the Cost of Capital," Journal of Accounting Research, Wiley Blackwell, vol. 45(2), pages 385-420, May.
    39. Najah Attig & Sadok El Ghoul & Omrane Guedhami & Jungwon Suh, 2013. "Corporate Social Responsibility and Credit Ratings," Journal of Business Ethics, Springer, vol. 117(4), pages 679-694, November.
    40. Lu, Jing & Wang, Jun, 2021. "Corporate governance, law, culture, environmental performance and CSR disclosure: A global perspective," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 70(C).
    41. Alexandre Garel & Arthur Petit-Romec, 2022. "CEO exposure to abnormally hot temperature and corporate carbon emissions," Post-Print hal-03515464, HAL.
    42. Avramov, Doron & Chordia, Tarun & Jostova, Gergana & Philipov, Alexander, 2009. "Dispersion in analysts' earnings forecasts and credit rating," Journal of Financial Economics, Elsevier, vol. 91(1), pages 83-101, January.
    43. Robyn Moroney & Carolyn Windsor & Yong Ting Aw, 2012. "Evidence of assurance enhancing the quality of voluntary environmental disclosures: an empirical analysis," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 52(3), pages 903-939, September.
    44. Peter M. Clarkson & Yue Li & Matthew Pinnuck & Gordon D. Richardson, 2015. "The Valuation Relevance of Greenhouse Gas Emissions under the European Union Carbon Emissions Trading Scheme," European Accounting Review, Taylor & Francis Journals, vol. 24(3), pages 551-580, September.
    45. Thomas E. Schneider, 2011. "Is Environmental Performance a Determinant of Bond Pricing? Evidence from the U.S. Pulp and Paper and Chemical Industries," Contemporary Accounting Research, John Wiley & Sons, vol. 28(5), pages 1537-1561, December.
    46. Qian, Wei & Schaltegger, Stefan, 2017. "Revisiting carbon disclosure and performance: Legitimacy and management views," The British Accounting Review, Elsevier, vol. 49(4), pages 365-379.
    47. Judy Ryan & Demi Tiller, 2022. "A Recent Survey of GHG Emissions Reporting and Assurance," Australian Accounting Review, CPA Australia, vol. 32(2), pages 181-187, June.
    48. Clarkson, Peter M. & Li, Yue & Richardson, Gordon D. & Vasvari, Florin P., 2008. "Revisiting the relation between environmental performance and environmental disclosure: An empirical analysis," Accounting, Organizations and Society, Elsevier, vol. 33(4-5), pages 303-327.
    49. Samaha, Khaled & Khlif, Hichem & Hussainey, Khaled, 2015. "The impact of board and audit committee characteristics on voluntary disclosure: A meta-analysis," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 24(C), pages 13-28.
    50. Humphrey, Jacquelyn E. & Li, Yong, 2021. "Who goes green: Reducing mutual fund emissions and its consequences," Journal of Banking & Finance, Elsevier, vol. 126(C).
    51. Robert D. Klassen & Curtis P. McLaughlin, 1996. "The Impact of Environmental Management on Firm Performance," Management Science, INFORMS, vol. 42(8), pages 1199-1214, August.
    52. Reiner Quick & Petra Inwinkl, 2020. "Assurance on CSR reports: impact on the credibility perceptions of non-financial information by bank directors," Meditari Accountancy Research, Emerald Group Publishing Limited, vol. 28(5), pages 833-862, June.
    53. Xia, Han, 2014. "Can investor-paid credit rating agencies improve the information quality of issuer-paid rating agencies?," Journal of Financial Economics, Elsevier, vol. 111(2), pages 450-468.
    54. Irene M. Herremans & Jamal A. Nazari & Fereshteh Mahmoudian, 2016. "Stakeholder Relationships, Engagement, and Sustainability Reporting," Journal of Business Ethics, Springer, vol. 138(3), pages 417-435, October.
    55. Ans Kolk & David Levy & Jonatan Pinkse, 2008. "Corporate Responses in an Emerging Climate Regime: The Institutionalization and Commensuration of Carbon Disclosure," European Accounting Review, Taylor & Francis Journals, vol. 17(4), pages 719-745.
    56. Nazari, Jamal A. & Hrazdil, Karel & Mahmoudian, Fereshteh, 2017. "Assessing social and environmental performance through narrative complexity in CSR reports," Journal of Contemporary Accounting and Economics, Elsevier, vol. 13(2), pages 166-178.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tesfaye T. Lemma & Martin Feedman & Mthokozisi Mlilo & Jin Dong Park, 2019. "Corporate carbon risk, voluntary disclosure, and cost of capital: South African evidence," Business Strategy and the Environment, Wiley Blackwell, vol. 28(1), pages 111-126, January.
    2. Jannik Gerwanski, 2020. "Does it pay off? Integrated reporting and cost of debt: European evidence," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 27(5), pages 2299-2319, September.
    3. Mahmoudian, Fereshteh & Lu, Jing & Yu, Dongning & Nazari, Jamal A. & Herremans, Irene M., 2021. "Inter-and intra-organizational stakeholder arrangements in carbon management accounting," The British Accounting Review, Elsevier, vol. 53(1).
    4. I-Ju Chen & Iftekhar Hasan & Chih-Yung Lin & Tra Ngoc Vy Nguyen, 2021. "Do Banks Value Borrowers' Environmental Record? Evidence from Financial Contracts," Journal of Business Ethics, Springer, vol. 174(3), pages 687-713, December.
    5. Rong He & Le Luo & Abul Shamsuddin & Qingliang Tang, 2022. "Corporate carbon accounting: a literature review of carbon accounting research from the Kyoto Protocol to the Paris Agreement," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(1), pages 261-298, March.
    6. Binh Bui & Muhammad Nurul Houqe & Muhammad Kaleem Zahir-ul-Hassan, 2022. "Moderating effect of carbon accounting systems on strategy and carbon performance: a CDP analysis," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 33(4), pages 483-524, December.
    7. Le Luo & Qingliang Tang & Hanlu Fan & Jamie Ayers, 2023. "Corporate carbon assurance and the quality of carbon disclosure," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(1), pages 657-690, March.
    8. Jiang, Yan & Luo, Le & Xu, JianFeng & Shao, XiaoRui, 2021. "The value relevance of corporate voluntary carbon disclosure: Evidence from the United States and BRIC countries," Journal of Contemporary Accounting and Economics, Elsevier, vol. 17(3).
    9. Tesfaye T. Lemma & Mehrzad Azmi Shabestari & Martin Freedman & Mthokozisi Mlilo, 2020. "Corporate carbon risk exposure, voluntary disclosure, and financial reporting quality," Business Strategy and the Environment, Wiley Blackwell, vol. 29(5), pages 2130-2143, July.
    10. Kabir, Md Nurul & Rahman, Sohanur & Rahman, Md Arifur & Anwar, Mumtaheena, 2021. "Carbon emissions and default risk: International evidence from firm-level data," Economic Modelling, Elsevier, vol. 103(C).
    11. Luo, Le & Tang, Qingliang, 2016. "Determinants of the Quality of Corporate Carbon Management Systems: An International Study," The International Journal of Accounting, Elsevier, vol. 51(2), pages 275-305.
    12. Lopin Kuo & Po-Wen Kuo & Chun-Chih Chen, 2021. "Mandatory CSR Disclosure, CSR Assurance, and the Cost of Debt Capital: Evidence from Taiwan," Sustainability, MDPI, vol. 13(4), pages 1-19, February.
    13. Le Luo & Qingliang Tang, 2021. "Corporate governance and carbon performance: role of carbon strategy and awareness of climate risk," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(2), pages 2891-2934, June.
    14. Yenny Naranjo Tuesta & Cristina Crespo Soler & Vicente Ripoll Feliu, 2021. "Carbon management accounting and financial performance: Evidence from the European Union emission trading system," Business Strategy and the Environment, Wiley Blackwell, vol. 30(2), pages 1270-1282, February.
    15. Qingxia (Jenny) Wang, 2023. "Financial effects of carbon risk and carbon disclosure: A review," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(4), pages 4175-4219, December.
    16. Yousaf, Umair Bin & Ullah, Irfan & Jiang, Junchen & Wang, Man, 2022. "The role of board capital in driving green innovation: Evidence from China," Journal of Behavioral and Experimental Finance, Elsevier, vol. 35(C).
    17. Tantawy Moussa & Amir Allam & Said Elbanna & Ahmed Bani‐Mustafa, 2020. "Can board environmental orientation improve U.S. firms' carbon performance? The mediating role of carbon strategy," Business Strategy and the Environment, Wiley Blackwell, vol. 29(1), pages 72-86, January.
    18. Haifei Wang & Hongjun Wu & Peter Humphreys, 2022. "Chinese Merchant Group Culture, Corporate Social Responsibility, and Cost of Debt: Evidence from Private Listed Firms in China," Sustainability, MDPI, vol. 14(5), pages 1-18, February.
    19. Khaled Alsaifi & Marwa Elnahass & Abdullah M. Al-Awadhi & Aly Salama, 2022. "Carbon disclosure and firm risk: evidence from the UK corporate responses to climate change," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 12(3), pages 505-526, September.
    20. Gutiérrez-López, Cristina & Castro, Paula & Tascón, María T., 2022. "How can firms' transition to a low-carbon economy affect the distance to default?," Research in International Business and Finance, Elsevier, vol. 62(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jiaata:v:52:y:2023:i:c:s1061951823000423. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/journal-of-international-accounting-auditing-and-taxation .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.