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Carbon Footprint, Financial Structure, and Firm Valuation: An Empirical Investigation

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  • István Hágen

    (Doctoral School of Economic & Regional Sciences, Hungarian University of Agriculture and Life Sciences, 2100 Gödöllő, Hungary
    Department of Investment, Finance and Accounting, Institute of Rural Development and Sustainable Economy, Hungarian University of Agriculture and Life Sciences, 2100 Gödöllő, Hungary)

  • Amanj Mohamed Ahmed

    (Doctoral School of Economic & Regional Sciences, Hungarian University of Agriculture and Life Sciences, 2100 Gödöllő, Hungary
    Department of Accounting, Darbandikhan Technical Institute, Sulaimani Polytechnic University, Sulaimaniyah 70-236, Iraq)

Abstract

This study aims to investigate the complex link between carbon emissions, firm value, and financial choice in regard to the GCC, a dynamic emerging economy. It also seeks to answer the question on whether the financial structure of a firm moderates the correlation between carbon emissions and firm value. We focus on analyzing data from non-financial firms registered on the GCC stock markets between 2010 and 2020. By applying the GLS technique, we assess the impact of carbon emissions on firm value and examine the manner in which a firm’s financial structure either enhances or hinders this relationship. The results demonstrate that there is a strong and adverse connection between carbon emissions and corporate value, as increased emissions translate into lower corporate value. The study then moves on to emphasize the critical role that capital financing plays in mitigating the detrimental effects of carbon emissions. This is accomplished by balancing both debt and equity in terms of their proper proportions (optimal capital structure). However, excessive borrowing could have adverse consequences in terms of carbon emissions on company value. Moreover, the GMM estimator is also applied to carry out a robustness check and the results are consistent with the main findings. This study highlights the significance of financial strategy in advancing sustainability and protecting business value. These findings are supported by both stakeholder and signaling theory, proving that companies can use their capital financing to signal their dedication to sustainability. These results could be used by GCC policymakers to create rules and regulations that encourage environmentally friendly corporate activities and efforts to lower emissions. The research expands the existing literature by examining the difficulties and opportunities faced by GCC firms when combining financial strategy with environmental objectives. It may be necessary to perform additional research in regard to various circumstances and for an extended period, because this study is restricted to non-financial sectors.

Suggested Citation

  • István Hágen & Amanj Mohamed Ahmed, 2024. "Carbon Footprint, Financial Structure, and Firm Valuation: An Empirical Investigation," Risks, MDPI, vol. 12(12), pages 1-22, December.
    • Handle: RePEc:gam:jrisks:v:12:y:2024:i:12:p:197-:d:1538238
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    References listed on IDEAS

    as
    1. Shirwan Rafiq Sdiq & Hariem A. Abdullah, 2022. "Examining the effect of agency cost on capital structure-financial performance nexus: empirical evidence for emerging market," Cogent Economics & Finance, Taylor & Francis Journals, vol. 10(1), pages 2148364-214, December.
    2. Hariem Abdullah & Turgut Tursoy, 2021. "Capital structure and firm performance: evidence of Germany under IFRS adoption," Review of Managerial Science, Springer, vol. 15(2), pages 379-398, February.
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