Abstract
Purpose- In 2008 China issued the Measures for the Disclosure of Environmental Information. Using the introduction of this environmental policy, this paper examines how the environmental information disclosure quality affects a firm's access to capital markets. In particular, the relationship is investigated between the environmental disclosure quality and the investment-cash flow sensitivity, a measure of a firm's financial constraints, before and after the implementation of the policy. Methodology- The content analysis is used to construct the measure of environmental disclosure quality. First of all, the contents of both qualitative and quantitative environmental disclosures are analyzed with respect to the following ten areas reported in firms' annual reports: (1) corporate investment in environmental protection, (2) government financial support related to environmental control, (3) tax reductions related to environmental programs, (4) lawsuits, settlements, penalties, and rewards related to environmental protection, (5) emissions and pollution reduction implementation, (6) certifications of environmental programs, (7) firm environmental protection missions and goals, (8) firm environmental protection plans and strategies, (9) bank loans related to environmental protection, and (10) other environmental-related information. And then, different points are assigned based on the disclosure quality for each of the ten disclosure areas and aggregated to obtain an overall disclosure score. Univariate and regression tests are used to examine the relationship between environmental information disclosures and investment-cash flow sensitivity. Findings- A negative association is found between a firm's environmental disclosure quality and the investment-cash flow sensitivity after the policy was implemented, while no such association is found before the policy implementation. Furthermore, the observed reduction in investment-cash flow sensitivity tends to be stronger for firms in high-polluting industries. Conclusion- Given the environmental policies in emerging markets are often viewed with great doubts, our findings suggest that government environmental policy plays an important role in firm's access to capital markets. Keywords: Environmental information disclosure, investment-cash flow sensitivity, government policy, asymmetric information, financial constraints JEL Codes: G18, G30, G32
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