Abstract
We studied how companies’ carbon disclosures affect the cost of capital under the Chinese government’s introduction of the Emissions Trading Scheme (ETS) regulation. We also tested how much the effect varied between state-owned and private enterprises, and between polluting and non-polluting industries. Since, at its early stage, the market may perceive signals and implementations of environmental regulation as a cost burden, the effect of environmental disclosure, which is traditionally known to reduce the cost of capital, may be different. Using a comprehensive index through content analysis and targeting companies in China’s pilot ETS regions between 2011 and 2016, our study showed the following test results. First, for the companies in regions where the ETS regulation was introduced, while carbon disclosure was below a certain level, disclosure raised the cost of capital, and after carbon disclosure was sufficiently high, disclosure decreased the cost of capital. Second, this inverted-U-shaped relationship appeared in non-state-owned enterprises only, and state-owned enterprises showed a traditional linear relationship that disclosure lowers the cost of capital. Third, this non-linear relationship was statistically significant only in the non-heavy pollution industries. This study contributes to the literature in that there are limited studies on the market effects of China’s early introduction of the ETS regulation.
Highlights
COE is the cost of equity financing; FEPSt+1 is the earnings per share during year t+1; FEPSt+2 is the earnings per share during year t+2; DPSt+1 is the dividend per share during year t+1; Pricet is the stock closing price at the end of year t
Among the companies of carbon emission disclosure in the Emissions Trading Scheme (ETS) regions, it can be said that the proportion of state-owned enterprises (SOEs) is tiny compared to the Chinese average (Li and Zhang [60], about 60%)
We investigated the effect of corporate carbon disclosure under the new regulatory environment, the mandatory Emissions Trading Scheme (ETS) implementation, on the cost of capital of Chinese companies from 2011 to 2016
Summary
Publisher’s Note: MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. We discovered an inverted-U-shaped relationship between carbon disclosure and the cost of capital for our sample companies located in regions where pilot ETS has been announced since 2011 and implemented since 2013. It appears that, below a certain disclosure level, the market predicted that the coercive pressure caused by the initial ETS implementation would increase the cost burden on companies and increase potential short-term risks. The non-linear result of this study showed that when the disclosure exceeds a certain level, the negative effect of regulatory pressure is overcome, and the traditional positive effect of disclosure appears Such a non-linear relationship for the ETS-regulated companies appeared only in non-state-owned enterprises (non-SOEs).
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