Comparative analysis of environmental performance measures and their impact on firms' financing choices

Abstract

This study investigates the roles of different measures of environmental performance in firms' financing choices. Environmental performance is measured through energy-efficiency investments, energy intensity, and energy consumption disclosures, which correspond to input-based, output-based, and disclosing perspectives, respectively. We further distinguish between debt financing and equity financing since environmental information asymmetry varies across investors, affecting the pecking order of financial sources. We use Eastern European and Central Asian firm-level data from the World Bank Enterprise Surveys conducted in 2019/2020. The study sample consists of above 3000 private firms from 42 countries. The logit model shows that alternative measures of environmental performance have varying impacts on financing. For a particular measure, it affects bank and equity financing in different ways. We also find that there is a direct joint impact of environmental investments and disclosures on equity financing. Overall, our study indicates that investors prefer to invest in eco-friendly firms rather than supporting conventional firms in reducing their environmental impacts. Hence, it is required to promote government support programs and loan guarantee programs to initiate firm-level environmental practices. Further, the complementary relationship indicates that firms may choose different environmental practices to reduce environmental information uncertainty, which improves the credibility of environmental information from the investors' perspective.