Does Air Pollution Affect Corporate Debt Cost? Evidence from China

Abstract

This study examines whether poor air quality affects corporate debt cost. By employing a regression discontinuity design (RDD) based on the discontinuity of air pollution caused by the Qinling-Huaihe line in China, we found that poor air quality significantly raises the debt cost of firms after. This positive effect is driven primarily by worker productivity and managerial sentiment. Furthermore, this effect is more significant for firms in low-competitive and heavily polluting industries, and those with poor external governance. Our results are robust to alternative measures and various model specifications. In summary, this study provides novel insights into the effects of poor air quality on increasing firms’ debt costs.

Keywords: Air pollution, debt cost, Human Capital, managerial sentiment, regression discontinuity design