Corporate Carbon Performance and Access to Finance: Empirical Evidence from Asia-Pacific Countries

Corporate Carbon Performance and Access to Finance: Empirical Evidence from Asia-Pacific Countries

This thesis presents a series of investigations on the effect of corporate carbon performance (CCP) on a firm's access to finance. In particular, these studies examine the relationships between CCP and cost of debt (COD), cost of equity (COE) and firm risk. The research uses a sample from 14 countries in the Asia-Pacific region over the period 2002–2018. This thesis comprises three empirical studies. The first paper reports on the study that examined the CCP–COD relationship. The second paper reports on the investigation of the relationship between carbon risk (CRISK) and COE, while the third paper reports on the examination of the question of how and why CCP affects a firm's total, idiosyncratic and systematic risk. All three papers also report on the examination of whether country-level governance quality moderates or strengthens these relationships. The research particularly examines whether, and to what extent, these relationships are affected by country-level governance mechanisms.

In the first paper, COD is found to be lower when a firm has higher carbon performance (CCP). We also find that CCP produces greater reductions in COD for firms in countries with poor government effectiveness, weak regulatory quality and weak rule of law. Thus, a country-level governance mechanism and debt markets are substitutes in addressing corporate carbon performance (CCP). This means that debt markets are more sensitive to the climate change issue in a weak governance setting. Next, in the second paper, we find that firms with higher CRISK have higher implied COE, with this relationship stronger in countries with strong country-level governance. Finally, in the third paper, we find that CCP is negatively associated with a firm's total, idiosyncratic and systematic risk. We also find that CCP yields greater reductions in a firm's total and idiosyncratic (systematic) risk in countries with strong (weak) country-level governance. This study documents that debt and equity market participants are becoming more aware of firms' environmental performance and are paying close attention to corporate carbon performance (CCP).

This research employed unbalanced panel data and used the ordinary least squares (OLS) regression model to test the hypotheses after controlling for a set of firm-level and country-level variables, in addition to the year and industry dummies. To confirm our main finding, we run a series of robustness checks to control for sample selection bias, endogeneity, heterogeneity and simultaneous causality problems using alternative model specifications. We also control for the effect of the Global Financial Crisis (GFC) and the sensitivity to using sub-sample analysis and alternative measures.

This research contributes theoretically and empirically to the management and finance literature by studying the relationship between CCP and corporate financial performance (CFP) ii and by examining whether the findings of previous studies are robust or whether they can be generalised to another geographical scope or another time period. As previous studies have revealed mixed findings on the CCP–CFP relationship, this research aims to either support or refute the existing theoretical arguments on this relationship in a multi-country context. Although these topics are highly researched in the contexts of developed markets, we know little about whether the findings are transferrable to the Asia-Pacific context. A multi-country sample provides an additional dimension to this research; it helps us to compare countries based on the level of governance quality. Indeed, this research pioneers the study of the role of country-level governance in the CCP–CFP relationship.

Companies today are under pressure from internal and external stakeholders to take serious action regarding environmental issues and to adopt environmentally friendly strategies and activities. This research shows that managers can reduce firm risk, COD and COE by improving their carbon performance. This research has shed light on one of the indirect costs and/or benefits of green projects/carbon-intensive projects of which a manager should be aware when making an investment decision. Understanding the nature of the implications of sustainable performance is also important for diverse stakeholders. It helps a firm's creditors and investors to conduct a better evaluation of its real market value and to realise whether carbon risk economically affects its intrinsic value and, furthermore, whether carbon risk affects its credit standing. In addition, this research helps policy makers to determine the extent to which they can rely on the market mechanism to address climate change concerns and to discover the country-level governance context in which the market mechanism could have the greatest impact.

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