Extreme local environmental events and the cost of debt: evidence from China

Purpose We used difference-in-differences research design to investigate the effect of the outbreak of extreme environmental events near firms’ headquarters on the cost of debt. Design/methodology/approach Using a sample of Chinese firms listed on the Shanghai and Shenzhen A-Share markets from 2004 to 2020, we find that treated firms, those that have extreme environmental events occurring within 25 kilometers of their headquarters, have a higher cost of debt. Findings We find an increase in the cost of debt for firms headquartered in areas where local environmental events occur, suggesting that the outbreak of extreme environmental events strengthens local government’s environmental enforcement and supervision. Originality/value Our paper contributes to the emerging literature on the role of environmental risk and performance in the context of debt financing. We extend prior literature on the determinants of the cost of debt from the perspective of the exogenous extreme environmental events.