U-shaped relationships between corporate carbon performance and cost of debt: Evidence of China

Abstract

The increasing environmental pressures and sustainability targets have necessitated organizations to actively adopting carbon-efficiency practices, thereby, emphasize key stakeholders' increasing awareness of the decarbonization projects in their decision-making. This paper seeks insights into whether and how corporate carbon performance (CCP) initiatives affect cost of debt (COD). Using a sample of publicly listed firms in China that disclosed carbon emissions from 2018 to 2022, this research verifies the U-shaped CCP–COD relationship. Furthermore, information asymmetric moderates the U-shaped CCP–COD relationship, with lower information asymmetric flattening the shape of the U-shaped curve. Overall, the existence of a non-linear pattern reconciles the extant inconsistent evidence that suggests either a positive or a negative CCP–COD linkage. This research provides comprehensive evidence that CCP implementations, while motived by ethical intention, can have a double-edged effect. These findings are pertinent to corporate stakeholders and governmental policymakers concerning the consequences of carbon-related activities of their organizations.