Environmental Externalities and Cost of Capital
Georgia Institute of Technology - College of Management
June 15, 2011
I analyze 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 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 and the consequent increase in the cost of equity and debt capital has the potential to prompt firms to internalize their environmental externalities.
Number of Pages in PDF File: 63
Keywords: Environmental Externalities, Cost of Capital, Bank Loans, Environmentally Sensitive Lending, Socially Responsible Investing
JEL Classification: D62, G21, G38, H23, H43working papers series
Date posted: September 17, 2010 ; Last revised: June 16, 2011
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo2 in 0.468 seconds