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<p>The growing concerns over climate change and carbon emissions have heightened the need to understand the financial implications of firms’ carbon risk (CRISK). This study examines the relationship between carbon risk (CRISK) and cost of equity (COE) and whether, and to what extent, this relationship is affected by country-level governance. Using a sample of 6,760 firm-year observations from 13 Asia-Pacific countries over the period 2002–2023, firms with higher CRISK are found to have higher implied COE, with this relationship stronger in countries with strong country-level governance. The main findings are robust to addressing endogeneity, sample selection bias and heterogeneity problems through using alternative model specifications. They are also robust after using individual COE estimates and sub-sample analysis. Further analysis indicates that the CRISK–COE relationship is positive (neutral) before and after (during) the Global Financial Crisis (GFC). This study contributes to the literature by providing empirical evidence on the financial consequences of carbon risk, emphasizing the importance of national governance structures in moderating the CRISK–COE relationship. It also provides valuable insights into how equity market participants respond to CRISK in a multi-country context highlighting the moderating role of country-level governance on the CRISK–COE relationship.</p>

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Carbon risk and cost of equity: the role of country-level governance

  • 期刊论文

  • 发表日期：

    2025年10月31日

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  • Eltayyeb Al-Fakir AI Rabab’a,
  • Syed Shams,
  • Afzalur Rashid

摘要

The growing concerns over climate change and carbon emissions have heightened the need to understand the financial implications of firms’ carbon risk (CRISK). This study examines the relationship between carbon risk (CRISK) and cost of equity (COE) and whether, and to what extent, this relationship is affected by country-level governance. Using a sample of 6,760 firm-year observations from 13 Asia-Pacific countries over the period 2002–2023, firms with higher CRISK are found to have higher implied COE, with this relationship stronger in countries with strong country-level governance. The main findings are robust to addressing endogeneity, sample selection bias and heterogeneity problems through using alternative model specifications. They are also robust after using individual COE estimates and sub-sample analysis. Further analysis indicates that the CRISK–COE relationship is positive (neutral) before and after (during) the Global Financial Crisis (GFC). This study contributes to the literature by providing empirical evidence on the financial consequences of carbon risk, emphasizing the importance of national governance structures in moderating the CRISK–COE relationship. It also provides valuable insights into how equity market participants respond to CRISK in a multi-country context highlighting the moderating role of country-level governance on the CRISK–COE relationship.