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The purpose of this study is to examine the effect of carbon emission on accounting and market-based financial performance of Indian companies.

Firms reporting emission data on Carbon Disclosure Project (CDP) are considered for empirical analysis and the data have been collected for the period from 2013 to 2019. The study adopts Heckman's regression model to control for self-selection bias and it also examines the moderating role of environmental sensitivity through industry-wise analysis. The results are also checked for potential endogeneity using generalized methods of moments estimation.

Primarily, the findings postulate a significant negative impact of carbon emissions on both measures of financial performance. Further, it also determines that environmentally sensitive firms are more exposed to such negative influence of emission compared to nonsensitive companies.

Current research will enhance the understanding of managers about the economic impact of carbon emission, especially in an economy where emissions are not completely regulated. The study provides an economic rationale to the industries to reduce emission volume. It will also assist regulators to draft environmental policies by considering environmental sensitivity. It should be noted that the study is based on the Indian firms that have reported emission data on the CDP during the study period.

The present study addresses one of the most important but less explored issues of environmental research in one of the largest emerging economies of the South Asian region. The study presents a comprehensive view by covering accounting as well as market-based indicators along with the moderating effect of environmental sensitivity.