Capital Structure and Environmental Performance: International Evidence with Firm Fixed Effects and Endogeneity Safeguards

Abstract

This study examines the relationship between corporate leverage and environmental performance in a broad international panel, testing whether the relationship is non-monotonic and applying sequential safeguards against reverse causality and omitted-variable bias. The sample comprises 90,979 firm-year observations from 11,648 firms across 98 countries and 30 industries (2005-2024), drawn from the LSEG (Refinitiv) ESG and financial databases. The Emissions Score (0-100) is regressed on leverage (debt/equity) using pooled OLS with industry, country and year fixed effects and a squared-leverage term for nonlinearity; lagged leverage and two-stage least squares address reverse causality, and firm fixed effects with profitability/tangibility controls provide further robustness, with errors clustered by firm. Leverage is negatively associated with the Emissions Score in every specification (coefficients -0.21 to -0.50), but significance is sensitive to the controls: significant at 1% pooled, marginal at 10% with full fixed effects, and insignificant (p = 0.130) once profitability and tangibility join those effects; a marginal association persists with firm and year effects (p = 0.071). The squared-leverage, lagged-leverage and 2SLS terms are never significant. The study pairs a large international sample with layered endogeneity safeguards rarely reported together in this literature, showing how fragile the leverage-emissions link becomes once each safeguard applies.