Carbon emissions and default risk: International evidence from firm-level data

Md Nurul Kabir, Sohanur Rahman, Md Arifur Rahman and Mumtaheena Anwar

Economic Modelling, 2021, vol. 103, issue C

Abstract: In this study, we investigate the effect of carbon emissions on firms' default risk. While existing literature exhibits the implications of emissions for firm performance and value, little is known about its impact on the default risk and underlying economic channels of the impact. Using a panel dataset of 2785 unique firms over the period 2004–2018 from 42 economies, we document a significant and negative impact of emissions on firms' distance-to-default, a reverse measure of default risk. We also provide evidence that firms’ environmental commitments and green initiatives mitigate the effect of emissions on default risk while environmental controversies exacerbate the effect. Finally, we identify the ROA and cash flow volatility as potential channels through which emissions affect the default risk. Overall results suggest that credit risk implications of firm-level emissions are worth considering in policy decisions by relevant stakeholders.

Keywords: Carbon emissions; Climate change; Default risk; Distance-to-default; Environmental commitment (search for similar items in EconPapers)
JEL-codes: G32 G41 M41 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (48)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:103:y:2021:i:c:s0264999321002066

DOI: 10.1016/j.econmod.2021.105617

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