Environmental Externalities and Cost of Capital

  title={Environmental Externalities and Cost of Capital},
  author={Sudheer Chava},
  journal={Environmental Economics eJournal},
  • S. Chava
  • Published 15 June 2011
  • Economics, Business
  • Environmental Economics eJournal
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… 

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