How does carbon regulatory policy affect debt financing costs? Empirical evidence from China

This study aimed to examine the effect of Chinese carbon regulatory policy on the debt financing costs of carbon-intensive corporations. We use a large sample covering the years between 2005 and 2018. The results of the difference-in-differences approach show that creditors increased debt financing costs for carbon-intensive corporations considerably due to the low-carbon policy, hence decreasing these corporations' profitability and value. Additional analyses show that the dynamic policy effect gradually increased from 2010 on and weakened later in 2015 owing to China's economic slowdown and the local stock market crash. The impacts of low-carbon policies on corporate debt financing costs are more pronounced for state-owned corporations and those with low analyst followings. Our findings provide corporations and governments with crucial insights into mitigating climate transition risk.