Do firms with higher carbon emissions face a higher cost of capital in Nigeria?

This study examines the relationship between carbon emissions and the cost of capital among publicly listed firms in Nigeria from 2015 to 2024. Using panel data from 148 firms across multiple sectors, we investigate whether environmental performance, specifically carbon emissions, influences firms' financing costs in an emerging market context. The analysis employs fixed effects and random effects panel regression models with robust standard errors to account for heterogeneity and endogeneity concerns. Our findings reveal a statistically significant positive relationship between carbon emissions and the cost of capital, suggesting that firms with higher carbon footprints face increased financing costs. This relationship persists after controlling for firm-specific characteristics, including size, profitability, leverage, liquidity, age, growth opportunities, cash flow volatility, and asset tangibility. The results contribute to the growing literature on environmental finance by providing empirical evidence from an African emerging market, demonstrating that environmental considerations increasingly influence capital market pricing decisions even in developing economies. The study has important implications for corporate environmental strategy, regulatory policy, and investment decision-making in the context of global climate change mitigation efforts.