Regional Climate Policy and Corporate Financing Decisions: Evidence from China's Water Pollution Control

50 Pages Posted: 17 Jan 2024

See all articles by Feng Wei

Feng Wei

Shandong University

Chi Man Yip

Hong Kong Polytechnic University - School of Accounting and Finance

Xiaojun Yu

Hong Kong Polytechnic University

Date Written: October 11, 2023

Abstract

We exploit China's water pollution control to estimate the causal effect of climate policy on corporate financing decisions. This paper provides an alternative perspective on the relationship between climate policy and capital structure. In contrast to the literature, our findings suggest that climate policy may not increase the cost of debt, firms may not decrease their financial leverage, and the policy effect may not be concentrated on financially constrained firms. Instead, firms appear to increase the proportion of long-term liabilities in their capital structures, and the effects can only be found among financially unconstrained firms. Our findings suggest that (i) the documentation of leverage responses to climate policy in the literature arises mainly from the increased cost of debt, (ii) capital structures remain intact without the cost of debt being significantly affected, and (iii) a climate policy constitutes an essential consideration in debt maturity structures.

Keywords: Climate Policy; Capital Structure; Debt Maturity Structure.

JEL Classification: G32, O16, Q52

Suggested Citation

Wei, Feng and Yip, Chi Man and Yu, Xiaojun, Regional Climate Policy and Corporate Financing Decisions: Evidence from China's Water Pollution Control (October 11, 2023). Available at SSRN: https://ssrn.com/abstract=4640833 or http://dx.doi.org/10.2139/ssrn.4640833

Feng Wei

Shandong University ( email )

27 Shanda Nanlu
South Rd.
Jinan, SD 250100
China

Chi Man Yip (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Xiaojun Yu

Hong Kong Polytechnic University ( email )

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