Disentangling the environmental penalty from financial contagion: spatial dynamics in corporate capital structure

Corporate sustainability is increasingly critical to financial strategy, yet empirical models often fail to isolate how markets price non-financial externalities versus structural financial risks across industry networks. Thus, the core problem investigated is whether lenders financially punish a single company for its own pollution, or if they restrict money to the entire industry when one firm fails. Addressing this gap, this study investigates the spatial dynamics of corporate capital allocation, explicitly separating the localized financial punishments associated with environmental degradation from the systemic shocks of industry-wide debt contagion. Analyzing a nine-year (2013–2021) panel of sixty-five firms listed on the Johannesburg Stock Exchange, this research employs a Spatial Panel Durbin Model, fortified by time-lagged temporal precedence and cross-sectional demeaning, to eliminate simultaneity and omitted variable biases. The findings reveal a bifurcated market mechanism. Capital providers enforce a strictly localized financial penalty for physical waste generation, while energy inefficiency acts as a compounding structural flaw that restricts broader market access; conversely, excessive peer leverage triggers severe, systemic credit contraction across the economic network. The main contribution of this study is proving a clear divide: markets punish individual companies for their own environmental mistakes, but financial panic spreads across the whole industry. By resolving this, the research gives managers and policymakers a clear roadmap for managing green investments without the fear of triggering sector-wide financial crashes. These spatial dynamics advance stakeholder and contagion theories by providing strong evidence that markets isolate environmental risks but socialize financial vulnerabilities. This three‑panel graphical abstract illustrates (1) the theoretical framework andproblem of how markets price different risks, (2) the methodology using a Spatial PanelDurbin Model (SPDM) on 65 JSE JSE‑listed firms (2013 2021), and (3) the dualmechanism findings: a localized environmental penalty and systemic financialcontagion, with policy implications for firm firm‑specific environmental taxes.