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Environmental regulation and the cost of debt: Evidence from the carbon emission trading system pilot in China

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  • Ni, Xiaoran
  • Jin, Qi
  • Huang, Kunhao

Abstract

This paper explores the financing effect of environmental regulation in view of the cost of debt. Using a sample of Chinese A-share listed firms from 2010 to 2016, we document that the introduction of the Carbon Emission Trading System (ETS) pilots significantly increases a firm's cost of debt by 0.140 percentage points on average. This effect is exacerbated for firms with higher external finance dependence, facing higher external pressures, and operating in a more competitive product market, and is weakened for firms with higher mortgage capacity. Overall, we show that the implementation of ETS may incentivize risky investments, which may be value enhancing in the long run to some extent, but also increase the distress risk, and increase the risk premium requirements of creditors who pay more attention to downside risks.

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  • Ni, Xiaoran & Jin, Qi & Huang, Kunhao, 2022. "Environmental regulation and the cost of debt: Evidence from the carbon emission trading system pilot in China," Finance Research Letters, Elsevier, vol. 49(C).
    • Handle: RePEc:eee:finlet:v:49:y:2022:i:c:s1544612322003579
    DOI: 10.1016/j.frl.2022.103134
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    Cited by:

    1. Shang, Yuping & Raza, Syed Ali & Huo, Zhe & Shahzad, Umer & Zhao, Xin, 2023. "Does enterprise digital transformation contribute to the carbon emission reduction? Micro-level evidence from China," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 1-13.
    2. Yusen Luo & Zhengnan Lu & Chao Wu & Claudia Nyarko Mensah, 2023. "Environmental Regulation Effect on Green Total Factor Productivity: Mediating Role of Foreign Direct Investment Quantity and Quality," IJERPH, MDPI, vol. 20(4), pages 1-18, February.
    3. Alexander, Anna & De Vito, Antonio & Menicacci, Luca, 2024. "At what cost? Environmental regulation and corporate cash holdings," Finance Research Letters, Elsevier, vol. 61(C).
    4. Long, Wenbin & Qu, Xin & Yin, Saifeng, 2023. "How does carbon emissions trading policy affect accrued earnings management in corporations? Evidence from China," Finance Research Letters, Elsevier, vol. 55(PA).
    5. Yadu Zhang & Yiteng Zhang & Zuoren Sun, 2023. "The Impact of Carbon Emission Trading Policy on Enterprise ESG Performance: Evidence from China," Sustainability, MDPI, vol. 15(10), pages 1-27, May.
    6. Huang, Zijie & Cao, June & Pan, Lei, 2024. "Greening your way to profits: Green strategies and green revenues," Finance Research Letters, Elsevier, vol. 61(C).
    7. Wang, Yong & Song, Chunyang & Wang, Wenhao, 2023. "Suppliers’ decision on green innovation: A response to customers’ environmental regulation," Finance Research Letters, Elsevier, vol. 58(PA).
    8. Ding, Xin & Li, Jingshan & Song, Tiantian & Ding, Chenyang & Tan, Wenhao, 2023. "Does carbon emission of firms aggravate the risk of financial distress? Evidence from China," Finance Research Letters, Elsevier, vol. 56(C).
    9. Wang, Ting & Tang, Jian & Wang, Xiao & He, Qiankun, 2024. "Assessing capital allocation efficiency under environmental regulation," Finance Research Letters, Elsevier, vol. 62(PA).
    10. Li, Xiaofan & Ye, Yongwei & Liu, Zhaoda & Tao, Yunqing & Jiang, Jingjing, 2024. "FinTech and SME’ performance: Evidence from China," Economic Analysis and Policy, Elsevier, vol. 81(C), pages 670-682.

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    More about this item

    Keywords

    Environmental regulation; China's carbon emission trading system; Corporate financing; Cost of debt;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

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