Government Environmental Pressure and Market Response to Carbon Disclosure: A Study of the Early Chinese ETS Implementation

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.

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“…This outcome contradict the hypothesis regarding ownership type, aligning with previous studies by Peng et al (2015), Halkos and Skouloudis (2016), Faisal et al (2018), andKumar (2022). Jin et al (2021) state that social pressure in emerging countries is lower compared to developed countries, where government influence significant shapes business political legitimacy. Consequently, this scenario indicates that SOEs, possessing strong political legitimacy, might be less responsive to regulatory pressure.…”

“…This may suggest that different type of ownership do not necessary imply companies' disclosure behavior. Nevertheless, the correlation analysis solely shows relationships between two variables, ignoring potential impacts from other influencing factors (Jin et al, 2021). Hence, a regression analysis that factors in other potential influences is necessary to gain a deeper understanding of these relationships.…”

Voluntary Disclosure of Carbon Emissions Information, Managerial Ability, and Credit Ratings

“…Research on whether disclosure of corporate environmental performance is useful for investors to evaluate corporate value has long received much attention in the field of environmental accounting [15][16][17][18][19][20][21]. Previous studies have mainly concentrated on the impact of environmental performance on corporate value [21][22][23][24][25][26][27][28][29][30][31][32][33].…”