Does the Capital Market Value Carbon Emission Reductions? Evidence from China

Abstract

ABSTRACT: An increasing number of Chinese companies are strengthening their commitment to corporate social responsibility (CSR) by reporting their carbon emission reductions. Research suggests that such voluntary environmental disclosures can reduce information asymmetry, decrease the cost of capital, and thus enhance firm value. However, a significant research gap exists because this evidence mainly derives from developed countries, with limited consideration given to emerging countries, where the capital market often lacks robust informational content. To fill this research gap, we endeavor to explore the firm-value effects of the disclosures and the magnitude of carbon reduction in China, the largest emerging market. By manually collecting data on carbon emission reductions from the CSR reports of Chinese listed companies from 2008 to 2013, we employ the balance sheet valuation model and ordinary least squares regression to investigate the firm-value effects of the disclosures and the magnitude of carbon emission reductions. The empirical results show that firm value is positively associated with not only voluntary carbon emission reduction disclosures, but also the magnitude of carbon emission reductions. In our sample, for every additional ton of carbon emission reduction, firm value increases by approximately 340 yuan (equivalent to 44 euros or 52 US dollars). We also find that the firm-value effects of carbon emission reductions are more pronounced in high-pollution industries than those in low-pollution industries. Further channel tests reveal that on average, agency problems, as measured by selling, general, and administrative expenses, are lower in firms that disclose carbon emission reduction information than those that do not. In addition, firms with carbon emission reduction disclosures can obtain more green subsidies than those without such disclosures. To mitigate climate risk, firms should proactively engage in carbon emission reductions, which can potentially receive a positive recognition from the capital market. Our study also provides valuable insights for regulators in terms of establishing and enhancing carbon accounting standards to encourage corporate involvement in carbon reductions.