Impact of carbon trading policy on corporate capital structure: Empirical evidence from China

Abstract

Introduction: The Chinese government has taken the lead in proposing a carbon trading market policy to address the negative impact of excessive carbon emissions on global climate change. Since this policy’s implementation in 2011, it has had a profound impact on economic development and the structure of the national economy. In this context, we aim to study how environmental regulation and transition risks associated with climate change affect corporate capital structure.Methods: Based on data provided by listed companies in China’s energy-intensive sector, this study uses a Difference-in-Difference (DID) model to examine the effect of the carbon trading policy on corporate capital structure.Results: According to our results, we predict that the carbon trading policy will significantly reduce the corporate debt ratio, which remains true even when an instrumental variables approach is used to account for endogeneity and after robustness tests are conducted. This study also shows that the negative effect of the carbon trading policy on corporate capital structure is mainly a product of internal capital demand and external capital supply. In addition, the reduction effect that the carbon trading policy has on the corporate debt ratio is more significant among firms with lower government subsidies and among nonstate-owned firms.Discussion: These findings imply that under the implementation of a carbon trading market policy, firms’ financial decision-making will change significantly in response to the policy-induced shocks of elevated corporate risk behaviour.