Low-carbon governmental policies and cost of debt: evidence from China

Abstract

This paper uses the staggered difference-in-differences design to investigate the effects of the low-carbon city pilot (LCCP) policy on the cost and underlying mechanisms of debt financing for enterprises. Our findings show that the LCCP significantly decreases the debt cost of enterprises through enhancements in Environmental, Social, and Governance (ESG) performance and the reduction of information asymmetry. Additional analysis indicates that the LCCP’s ability to reduce the cost of debt is particularly pronounced for firms with higher agency costs and those located in China’s eastern regions. This study offers evidence for assessing the effectiveness of low-carbon policies and suggests recommendations to policymakers seeking to enhance the design and implementation of LCCP, thereby contributing to the green development of enterprises and regions.

Valuation Insight: A company’s impact on the environment is an important element in the value that it delivers. In China certain local governments introduced policies to facilitate the enterprise transition to low-carbon practices, standardizing reporting on greenhouse gas emissions and requiring the undertaking of green technological transformation. The paper finds that companies in these localities experienced significant decreases in debt costs through enhancements in ESG performance and the reduction of information asymmetry.