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

Ling Jin, Jun-Hyeok Choi, Saerona Kim and Dong-Hoon Yang
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Ling Jin: Department of Accounting, Yanbian University, 977 Gongyuan Rd, Yanji, Jilin 133002, China
Jun-Hyeok Choi: Department of Accounting, Dongguk University, 30 Pildongro 1-gil, Jung-gu, Seoul 04620, Korea
Saerona Kim: Department of Tax & Accounting, Gyeongsang National University, 501 Jinju-daero, Jinju City 52828, Korea
Dong-Hoon Yang: Department of Accounting, Dongguk University, 30 Pildongro 1-gil, Jung-gu, Seoul 04620, Korea

Sustainability, 2021, vol. 13, issue 24, 1-18

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.

Keywords: government pressure; carbon disclosure; cost of equity capital; state-owned enterprise; heavy pollution industry (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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