Environmental litigation risk premium in corporate equity financing costs

Duan Liu, Chang Chen, Shujie Yao and Nizhou Yu

Energy Economics, 2025, vol. 143, issue C

Abstract: The system of environmental public interest litigation is designed to address issues resulting from the lack of public interest entities in domains such as climate change and environmental quality control, which has the potential to affect resource allocation in the financial market. Based on a quasi-natural experiment from China's reform of the environmental public interest litigation system, this paper aims to investigate the effect of environmental risk on firm financing using a difference-in-differences methodology. Our research findings reveal that environmental public interest litigation significantly raises equity capital costs for highly polluting firms due to rising operational risk, environmental compliance pressure and market risk expectation. Further analysis indicates that a high ESG rating and an improved legal system help to reduce the so-called litigation risk premium. Critical empirical evidence is found to support the role of environmental judicial capacity in fostering a green development trajectory in the capital market, offering insights for the ongoing development of environmental judicial frameworks and the green transformation of China's listed firms.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:143:y:2025:i:c:s0140988325000520

DOI: 10.1016/j.eneco.2025.108229

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