Carbon risk and the cost of equity capital: Evidence from China

Jingjing Yan, Yaoqi Guo and Fenghua Wen

International Review of Economics & Finance, 2025, vol. 99, issue C

Abstract: This study investigates the relationship between carbon risk and the cost of equity capital, with a focus on the mechanisms through which carbon risk affects financial outcomes. Our findings reveal that the carbon emissions significantly increase the cost of equity capital, primarily through three channels: information asymmetry, cash flow volatility, and agency conflicts. We also find that low-carbon pilot policies reduce the carbon risk premium by increasing companies' green innovation efficiency and performance. Additionally, out results show that carbon emissions aggravate companies' financing difficulties, leading to a reduction in capital investment and promoting firms to adopt a geographic diversification strategy. Our study provides new insights into carbon risk mechanisms and the role of carbon policy interventions, offering implications for both investors and policymakers concerned with climate change's financial impacts.

Keywords: Carbon emissions; Cost of equity capital; Low-carbon policy; Financing decisions (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:99:y:2025:i:c:s1059056025001388

DOI: 10.1016/j.iref.2025.103975

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