Cost Of Debt Financing Research Articles

The impact of China's carbon emissions trading policy on corporate investment expenditures: Evidence from carbon-intensive industries

The carbon emissions trading (CET) policy internalises the cost of carbon emission reductions borne by companies, which will affect the companies' investment and management decisions. From a micro perspective, this paper analyzes the impact on company investment expenditure and its transmission mechanism by implementing the CET policy. Based on panel data of China's A-share listed companies from eight carbon-intensive industries spanning 2010 to 2020, the time-varying difference-in-difference model and its extended model are used to evaluate the impact of the policy in the pilot areas. The results show that: first, based on the cost effect and legality theories, CET policy can reduce the investment expenditure of the companies by 71.95%. Second, CET policy reduces corporate investment expenditures by increasing corporate debt financing costs. When debt financing costs increase by 120.25%, the investment expenditures will reduce by 2.56% indirectly while the intermediary effect of equity financing costs is not significant. Finally, with the implementation of CET policy, the inhibitory effect on corporate investment expenditures has gradually increased. CET policy has a more significant inhibitory effect on investment expenditures of nonstate-owned companies and small-scale companies. The results have passed the robustness test and provide evidence for the policy-maker to balance microeconomic entity development and carbon reduction, and for companies to make optimization investment and financing decisions in response to policy shocks effectively.

Financing constraints of firms: Is there political favoritism in the economic resources given by the central government?

AbstractEconomic resources within the jurisdiction of local governments in China shape the external financing environment of enterprises. However, few studies have focused on China's unique political hierarchy, which results in differentiated access to economic resources for different levels of local governments and substantially affects local corporate financing constraints. This paper examines the impact of city political hierarchy on firm financing constraints among Chinese A‐share listed firms from 2004 to 2019. We use the 200,000 population criterion for delineating the political hierarchy of cities in 1927 as the cutoff for fuzzy regression discontinuity design to identify causal effects. The results show that the greater a city's political rank is, the lower its financing constraints are. The mechanism suggests that the central government provides more financial and political resources to high‐level cities, directly and indirectly influencing the financing constraints of firms. In addition, high‐level cities' government preferences, bank loans, debt financing costs, and business credit are vital channels at the firm level. However, this effect varies depending on the ownership and size of the firm.

Sustainable Innovation and Economic Resilience: Deciphering ESG Ratings’ Role in Lowering Debt Financing Costs

AbstractThis study delves into the intricate dynamics between environmental, social, and governance (ESG) ratings and corporate debt financing costs among China’s A-share listed companies from 2010 to 2021. Analyzing a substantial dataset unveils a tangible link where higher ESG ratings correlate with significantly lower debt financing costs. This relationship manifests more prominently in enterprises with lower pollution levels, state ownership, and those in China’s central and western regions, especially under heightened economic policy uncertainty. The findings elucidate that improved ESG ratings, reflective of robust sustainability practices, diminish corporate agency costs and enhance financial stability, thereby reducing debt financing expenses. This research extends the discourse in the knowledge economy by offering empirical evidence on how ESG integration can serve as a lever for financial efficiency and sustainability in business operations. By spotlighting the financial merits of embracing ESG criteria, the study offers profound insights for policymakers, investors, and corporations, encouraging the acceleration of ESG disclosure and assessment frameworks. In doing so, it supports the cultivation of high-caliber, environmentally friendly enterprises, aligning with the broader objectives of innovation, entrepreneurship, and societal welfare within the knowledge economy paradigm.

Social media and cost of debt financing: Evidence from stock forum text analysis

AbstractIn this article, we examine whether and how small investors’ social media activity is associated with subsequent bond credit spreads. We use extensive data from posts/comments on social media 30 days before the bond issuance announcement date to identify their implied power and find that the more posts/comments, the smaller the bond issuance spreads. We further find that information quality improvement of posts increases this negative relation between social media activity and bond cost, and that posts directly related to issuers’ fundamentals and/or debt financing drive our main results. Additional tests show that the effect is more salient when there is a greater demand for information quality or when macroeconomic conditions worsen.

The Impact of Corporate ESG Performance on Debt Financing Costs

The Impact of Corporate ESG Performance on Debt Financing Costs

Local government debt and corporate tax avoidance: Evidence from China

Leveraging a large sample of publicly listed companies in China from 2010 to 2021, this study investigates the impact of local government debt on corporate tax strategies. We provide compelling evidence that the scale of local government debt is positively associated with corporate tax avoidance. In addition, we find that corporate leverage ratios, financial constraints, and debt financing costs are three plausible mechanisms underlying the relationship we identified. The tax implications of local government debt are more evident among non-SOEs, small firms, and firms in financially less-developed regions. Our key findings are robust to a battery of identification strategies. Overall, this study enriches the literature on government debt and corporate tax avoidance.

Can Fintech Reduce the Cost of Corporate Debt Financing?

Amidst the wave of a new round of scientific and technological revolution, it has become an important strategic means for enterprises to accelerate the development of financial technology and promote the digital transformation of economic activities. This paper empirically examines the impact and mechanism of the listed companies' use of fintech on their own debt financing costs, and concludes that the development of fintech can significantly reduce the cost of corporate debt financing, and the lower the degree of information asymmetry between enterprises and financial institutions, the lower the concentration of supply chain, the more significant the effect of fintech on reducing the cost of corporate debt financing. This paper brings fintech and corporate debt financing cost into the same analytical framework, expands existing research, and puts forward corresponding suggestions and prospects.

Environment Social Governance Performance and Capital Structure: Evidence in Indonesia and Malaysia

Purpose: This research aims to investigate the relationship between Environmental, Social, and Governance (ESG) performance and capital structure, using Debt-to-Equity Ratio (DER) and Debt-to-Asset Ratio (DAR) proxies, in Indonesia and Malaysia. The study seeks to address the gap in the literature by exploring how ESG factors influence the capital structure decisions of both financial and non-financial companies in these countries. Additionally, the research analyzes the impact of ESG performance on the cost of equity and cost of debt. Methods: The research utilizes secondary data extracted from annual reports and sustainability reports spanning from 2015 to 2020. A total of 102 companies, comprising 59 Indonesian companies and 52 Malaysian companies registered on CSRHub, are included in the analysis. ESG performance is assessed based on community, environmental, social, and governance indicators. Capital structure is measured using DER and DAR proxies. Statistical analysis techniques are employed to examine the relationship between ESG performance and capital structure, as well as its impact on the cost of equity and cost of debt. Results and Discussion: The research findings indicate that community, environmental, social, and governance performance exhibit a negative effect on the cost of equity, suggesting that companies with stronger ESG performance experience lower costs of equity financing. However, these ESG factors do not significantly affect the cost of debt. This implies that while ESG performance may influence equity holders' perceptions of risk and return, it may not have a direct impact on the cost of debt financing for companies in Indonesia and Malaysia. Implications of the Research: The results of this research have important implications for companies, investors, and policymakers interested in understanding the relationship between ESG performance, capital structure decisions, and financing costs. By demonstrating the impact of ESG factors on the cost of equity, the findings underscore the importance of integrating sustainability considerations into financial decision-making processes. Moreover, the research highlights the need for further investigation into the mechanisms through which ESG performance influences capital structure and financing costs. Originality/Value: This study contributes to the literature by offering novel insights into the relationship between ESG performance and capital structure in Indonesia and Malaysia. By examining the impact of ESG factors on both equity and debt financing costs, the research expands our understanding of how sustainability considerations influence corporate financial decisions. The findings provide valuable guidance for companies seeking to enhance their ESG performance and optimize their capital structure, ultimately contributing to more sustainable and responsible business practices in emerging markets.

Competitor risk disclosure and firm M&A activities: evidence from textual analysis

ABSTRACT This paper investigates the impact of competitor risk disclosure on M&A activities of Chinese firms. By analysing 32,364 firm-year observations over 2007–2021, we find that competitor risk disclosure reduces the likelihood, frequency, and size of corporate M&A activities. Our findings withstand a series of endogeneity and robustness tests. Additionally, the increase of debt financing costs is the path through which competitor risk disclosure affects firms’ M&A activities. Further analyses show that financing constraints and non-state ownership amplify the impact of competitor risk disclosure on firms’ M&A activities. These findings enrich the literature on the economic consequences of competitor qualitative disclosure.

Impact of carbon disclosure on debt financing costs

Creditors, such as banks, often use disclosed environmental information to assess a company’s environmental risk and ensure the safety of debt funds. Consequently, carbon disclosures have become an important consideration for creditors when making investments. This study explores the relationship between carbon disclosure and debt financing costs using data on listed companies from 2008 to 2019. The results show that carbon disclosure can reduce the debt financing costs of enterprises, and that this influence is more significant for private companies than for state-owned enterprises. Instrumental variables and Propensity Score Matching (PSM) were used to evaluate the robustness of negative relationships. Furthermore, carbon disclosure has a more significant impact on debt costs with less environmental supervision pressure, weak residents’ environmental awareness, and weak product market competition. These findings provide guidance for companies’ carbon information disclosure and support the establishment of official carbon disclosure standards.

Impacts of trust on the cost of debt financing: The perspectives of in-group trust and out-group trust

This paper explores the impact of different types of trust on the cost of debt financing. Using trust data from the World Values Survey (WVS) and data on the listed companies in China, we find that in-group (out-group) trust has a positive (negative) impact on the cost of debt financing. We also establish that better corporate performance strengthens the impacts of the two types of trust, and higher external supervision weakens the impact of out-group trust. Further investigation finds that in-group (out-group) trust significantly impacts companies with weak (strong) financing constraints.

CEO narcissism and the agency cost of debt

This study investigates the relationship between CEO narcissism and debt financing costs, highlighting a potential trade-off between leadership traits and firm financial well-being. While prior research has identified potential benefits associated with narcissistic CEOs, such as enhanced innovation, we demonstrate that such leadership incurs higher borrowing costs, as evidenced by elevated bond yields in firms led by narcissistic executives. This effect is amplified for grandiose narcissists, suggesting that investors are particularly wary of their risk-taking tendencies. Leveraging a natural experiment, we establish a robust causal link between narcissism and debt costs, revealing higher bond yield premiums demanded by investors in firms with narcissistic CEOs. These findings underscore the critical importance of considering CEO personality traits, particularly narcissism when evaluating corporate governance practices and ensuring optimal alignment with stakeholders' interests.

The effect of environmental, social, and governance disclosure and real earning management on the cost of financing

AbstractThis study identifies if sustainable development practices measured through ESG information disclosure are related to stakeholder confidence, leading to a lower cost of debt and equity financing. We also investigate the possible moderating role of real earnings management. We apply a fixed effects panel data analysis to 1659 firm‐year observations of 177 European companies from 2010 to 2019. The results show that investors value ESG disclosure negatively and increase the cost of equity, whereas lenders value it positively and reduce the cost of debt. In addition, when the moderating effect of real earnings management is introduced, the effect of ESG disclosure on the cost of debt decreases, and the effect of ESG disclosure on the cost of equity is reinforced by increasing it. In the presence of real earnings management, investors and lenders seem to think companies use ESG disclosure to legitimise their practices or mislead financing providers.

ESG performance and corporate external financing in China: The role of rating disagreement

Following the thriving literature on the impacts of ESG performance on corporate financing, this paper investigates corporate ESG performance and debt-financing using a sample of Chinese listed firms. We pay special attention to the influence of rating disagreements across different agencies. While the positive role of ESG performance on the cost and amount of corporate debt financing is revealed, clear heterogeneity is found. More importantly, we uncover the role of rating disagreement, and find that only firms with agreed high ESG rating can benefit through lost cost and larger amount debt-financing. The results confirm the needs for firms to improve information disclosure and pay special attention to ESG performance. Moreover, improving ESG rating quality and establishing a consistent and effective rating system deserve regulators’ attention.

Leverage manipulation and strategic disclosure: evidence from non-financial information in annual reports based on multimodal machine learning

ABSTRACT This study adopts multi-modal machine learning to deeply interpret corporate non-financial information and explore the influence of corporate leverage manipulation on non-financial information disclosure. It is found that enterprises will strategically disclose non-financial information when implementing leverage manipulation, that is, the emotion of non-financial information text is more positive, farther away and more difficult. Based on the motivation of leverage manipulation, when enterprises face greater pressure of ‘deleveraging’ policy and stronger financing constraints, enterprises are more inclined to disclose non-financial information strategically when implementing leverage manipulation. Further, the dual motives of leverage manipulation are explored deeply. For the samples with high ‘deleveraging’ policy pressure such as state-owned enterprises and high media attention, and the samples with strong financing constraints such as high short-term debt repayment pressure and high debt financing cost, the positive relationship between leverage manipulation and strategic disclosure of non-financial information is more significant.

Local government financing vehicle restructuring, implicit government guarantees and debt financing costs: Evidence from the Chinese municipal corporate bond market

We contend that implicit government guarantees are included in municipal corporate bonds (also known as “Chengtou” bonds) issued by restructured local government financing vehicles (LGFVs) to address implicit government debt concerns, which implies lower debt financing costs. Using a sample of publicly issued Chengtou bonds between 2017 and 2021, we demonstrate that bond-specific risk is substantially reduced after LGFV restructuring. Similarly, the yield spreads on Chengtou bonds are considerably smaller than those on bonds issued by unrestructured LGFVs. Our findings generally imply that LGFV restructuring can lower debt financing costs through implicit government guarantees. Moreover, LGFV restructuring has had a credit effect, an operation effect and a willingness effect on reducing debt financing costs. Furthermore, the impact of restructuring is more pronounced among enterprises that are smaller in scale and less profitable and in regions with poorer economies. Additional investigations into the mechanism reveal that restructuring into a group enterprise can lower debt financing costs and reduce the reliance on implicit government guarantees.

Do creditors price climate transition risks? A natural experiment based on China's carbon emission trading scheme

The pursuit of carbon neutrality by China signifies the country's resolute commitment to proactively tackle climate change. However, traditional energy firms, which function as the pillars of the domestic economy, surely face a significant challenge in the form of "decarbonization." In light of climate transition risks, this study employs the difference-in-difference (DID) model to investigate the impact of China's carbon emission trading scheme (ETS) on the debt financing costs of listed high-carbon firms (HCFs). The findings indicate that the significant increase in debt financing costs of HCFs under ETS can be attributed to the "dual vulnerability" that HCFs exhibit, consisting of heightened credit risk and a diminished environmental reputation. Specifically, the implementation of ETS regulations results in elevated operating costs and future cash flow risks for firms, which subsequently escalates credit risk. This is especially true for establishments situated in regions characterized by high carbon emissions and high scores on the Low Carbon Economic Transition Assessment Index. Such data suggests creditors are progressively placing greater emphasis on the reputation of low-carbon environmental practices. Additional study suggests that firms that possess inferior qualification endowments, less external financing capabilities, and weaker risk-diverting capabilities are more susceptible to the effects of ETS and are subjected to more transformation pressure. The findings of this research hold substantial importance in terms of advancing ETS initiatives in a concentrated, phased, and clustered fashion, guaranteeing technological advancements and seamless transitions for HCFs throughout the carbon peak cycle, and eventually bolstering society's climate adaptability as a whole.

Exploration and Evaluation Expenditures and the Cost of Debt Financing

Exploration and Evaluation Expenditures and the Cost of Debt Financing

House price bubbles under the COVID-19 pandemic

We analyze bubble formations in house prices under the COVID-19 pandemic in 382 metropolitan areas in the U.S. with a special attention to the role of population density. We use a robust sieve-bootstrap version of the right-tailed unit root test procedure to identify periods of explosiveness in price–rent ratios across metro areas when controlling for fundamentals such as mortgage debt financing costs and the wealth of households. The bubble tests reveal evidence of explosive house prices during the COVID-19 pandemic but with important cross-area differences. In contrast to earlier bubble episodes, we find that the frequency and size of bubble formations under the pandemic have been stronger in low-density metro areas compared to high-density metro areas.

Supply Chain Finance and Financing Efficiency of Technology-based SMEs

Abstract Shortage of funds and inefficient financing have been the main problems faced by science and technology-based SMEs. Supply chain finance is aiding science and technology-based SMEs in obtaining financing opportunities and reducing the cost and difficulty of financing. This paper constructs a model for assessing financing efficiency with the help of Data Envelopment Analysis (DEA). And combined with the financing constraints commonly encountered by SMEs in the financing process, which affect the financing efficiency, it proposes a mediation effect model to analyze the influence of financing constraints. At the same time, the financing constraints faced by SMEs in science and technology are examined through an empirical model, and the mitigating effect of supply chain finance on financing constraints is analyzed through a model test. In the analysis of financing efficiency, the interest expense and pre-tax debt financing cost of DL science and technology-based companies are decreasing after supply chain finance financing. The interest expense is reduced by 2,009,200,200 in 2022 compared with 2019, and the pre-tax debt financing cost decreases to 6.12%. The proportion of supply chain financing in financing loans is more than 50%, the speed of capital turnover and financing efficiency have significantly improved, and the debt servicing capacity, operating capacity, and profitability have been improved.