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Environmental Externalities and Cost of Capital

Author

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  • Sudheer Chava

    () (Scheller College of Business, Georgia Institute of Technology, Atlanta, Georgia 30309)

Abstract

Ianalyze the impact of a firm's environmental profile on its cost of equity and debt capital. Using implied cost of capital derived from analysts' earnings estimates, I find that investors demand significantly higher expected returns on stocks excluded by environmental screens (such as hazardous chemical, substantial emissions, and climate change concerns) compared to firms without such environmental concerns. Lenders also charge a significantly higher interest rate on the bank loans issued to firms with these environmental concerns. I provide evidence that the environmental profile of a firm is not simply proxying for an omitted component of its default risk. Further, firms with these environmental concerns have lower institutional ownership and fewer banks participate in their loan syndicate than firms without such environmental concerns. These results suggest that exclusionary socially responsible investing and environmentally sensitive lending can have a material impact on the cost of equity and debt capital of affected firms. This paper was accepted by Brad Barber, finance .

Suggested Citation

  • Sudheer Chava, 2014. "Environmental Externalities and Cost of Capital," Management Science, INFORMS, vol. 60(9), pages 2223-2247, September.
  • Handle: RePEc:inm:ormnsc:v:60:y:2014:i:9:p:2223-2247
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    File URL: http://dx.doi.org/10.1287/mnsc.2013.1863
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    Citations

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    Cited by:

    1. repec:eee:eneeco:v:65:y:2017:i:c:p:1-15 is not listed on IDEAS
    2. Simon Cornée & Marc Jegers & Ariane Szafarz, 2018. "A Theory of Social Finance," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 2018-02, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
    3. repec:kap:jbuset:v:144:y:2017:i:3:d:10.1007_s10551-015-2856-1 is not listed on IDEAS
    4. repec:kap:jbuset:v:147:y:2018:i:2:d:10.1007_s10551-015-2971-z is not listed on IDEAS
    5. Andreas Welling, 2017. "Green Finance: Recent developments, characteristics and important actors," FEMM Working Papers 170002, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    6. repec:bla:stratm:v:38:y:2017:i:11:p:2266-2284 is not listed on IDEAS
    7. repec:kap:jbuset:v:150:y:2018:i:1:d:10.1007_s10551-016-3193-8 is not listed on IDEAS
    8. Clive S. Lennox & Asad Kausar, 2017. "Estimation risk and auditor conservatism," Review of Accounting Studies, Springer, vol. 22(1), pages 185-216, March.
    9. repec:gam:jsusta:v:10:y:2017:i:1:p:13-:d:123875 is not listed on IDEAS
    10. repec:kap:jbuset:v:144:y:2017:i:3:d:10.1007_s10551-015-2814-y is not listed on IDEAS
    11. repec:pal:jintbs:v:49:y:2018:i:5:d:10.1057_s41267-017-0125-5 is not listed on IDEAS
    12. repec:kap:jbuset:v:149:y:2018:i:2:d:10.1007_s10551-015-3005-6 is not listed on IDEAS
    13. 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).
    14. repec:eee:corfin:v:48:y:2018:i:c:p:700-725 is not listed on IDEAS
    15. repec:kap:rqfnac:v:50:y:2018:i:1:d:10.1007_s11156-017-0630-4 is not listed on IDEAS
    16. repec:kap:rqfnac:v:49:y:2017:i:2:d:10.1007_s11156-016-0598-5 is not listed on IDEAS
    17. repec:taf:oabmxx:v:4:y:2017:i:1:p:1356608 is not listed on IDEAS

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