Carbon Risk and the Cost of Capital: Evidence from Indian Listed Firms
DOI:
https://doi.org/10.66635/v2jff721Keywords:
Carbon risk, Cost of equity, Promoter shareholding, Sustainable finance, Indian listed firmsAbstract
As investors get more aware of climate risks and factor them into capital allocation, carbon risk is emerging as a critical factor in corporate financing decisions. This study focuses on the above relationship between carbon risk and Cost of Equity (CoE) in the listed companies of India and explores moderating effect of promoter shareholding. Secondary panel data consisting of 450 firm-year observations were used, with a quantitative research design. Two proxies measuring carbon risk (i.e., relative to net sales and total assets) and the cost of equity (i.e., estimated by the Capital Asset Pricing Model – CAPM) were employed. To test the proposed relationships and deal with potential endogeneity, the data were regressed in panel with year fixed effects as well as instrumental variable estimation. The results show that the carbon risk positively and significantly influences the cost of equity, which means that firms with advanced carbon exposure have a higher cost of equity, because of the higher environmental and transition risk perceived. Results also indicate that the relationship is weaker when promoter shareholding is present, suggesting that promoter concentration may bolster investor confidence and reduce carbon risk impact. The study demonstrates the value of good carbon risk management, open environmental reporting and good corporate governance for better financing conditions and for the sustainable corporate development in emerging economies.
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