Regulation intensity, environmental disclosure, and cost of capital: evidence from listed firms in China

While theoretical deductions propose that environmental disclosure helps reduce cost of capitals, this conclusion is not always supported in empirical investigations and many factors moderate this connection. In this paper, we re-examine the issue against a unique background, say in the new development stage of China that pursues a balance between economic growth and environmental protection. Specifically, we build an environmental disclosure index and relate it with the costs of equity and debt capitals. We find the disclosure does not significantly contribute to the variation in either cost, when the relationship is estimated in pooled samples. However, when regulation intensity is involved, the puzzle is resolve. In the debt market, we find institutional investors generally devalues environmental disclosure but appreciate disclosure by essentially polluting firms. In contrast, retail investors in the stock market generally respond to environment disclosure in a positive way, but the disclosure by traditionally recognized polluting firms leads to increase in the cost of equity capital. Our work features important heterogeneity between debt and equity markets, and also the role of regulation intensity in moderating the connection.