Environmental administrative penalty, corporate environmental disclosures and the cost of debt

Abstract

The role of environmental information disclosure (EID) in debt financing for penalized enterprises remains limited in the current literature. This research seeks to investigate this topic by focusing on manufacturing firms that have been penalized by the Chinese government for violating environmental rules and regulations. Further, it analyzes how environmental administrative penalties impact the debt cost in the following year. Based on our results, the environmental administrative penalty significantly increases the debt cost in the following year through the negative increment of the company's disclosure quality, and the incremental disclosure plays a mediating role in this relationship. Besides, it has also been found that environmental administrative penalties cannot affect the debt cost by changing the disclosure level. While the existing literature has established that environmental penalties can lead to changes in corporate information disclosure, this research contributes to this literature by revealing that the decline of environmental disclosure quality of penalized firms leads to the increase of financing costs.