Environmental Impact Shaping a Firm's Zero Leverage Decision: Analysing Debt Demand and Supply Determinants

ABSTRACT Zero‐leverage firms remain a puzzle in corporate finance. We propose a supply‐side mechanism linking environmental impact to debt access. Because creditors favour firms with high negative externalities and strong cash flows, environmentally friendly firms with high initial costs face tighter credit constraints. Using a theoretical model and a bivariate probit on 1113 firms across 54 countries (2011–2024), we show that positive environmental impact significantly reduces debt availability. The effect varies with firm development, industry environmental sensitivity, environmental regulation and Environmental, Social and Governance (ESG) performance. The findings highlight the importance of jointly estimating debt demand and supply.