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| The Impact of Environmental Rule of Law on Bond Financing Cost: Evidence from Environmental Courts in China |
| GAO Haoyu, WEN Huiyu
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| School of Finance, Renmin University of China |
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Abstract With climate change becoming a social and development issue of great concern, carbon emission peak and carbon neutrality have become critical tasks in China at this stage. How to promote green transformation and achieve high-quality development has received broad discussion. Strong protection of environmental rule of law is indispensable to facilitate green orientation in financial markets under the “market-led and government-guided” principle. Moreover, bringing capital vitality to green transformation is an important embodiment of improving the level of financial servicing entity economy. Hence, to explore the coordinated development of economy and ecology and improve the functions of financial markets in the new era, it is of great practical significance to examine the real effects of the environmental rule of law construction in enterprises and financial markets.
Based on a quasi-natural experiment on the establishment of specialized environmental courts (EC) in China's Intermediate People's Courts, we exploit the staggered difference-in-difference-in-differences (DDD) method to examine the impact of the environmental rule of law on the cost of bond financing, utilizing a data set of corporate bonds, enterprise bonds and medium-term notes issued from 2008 to 2019. We find that after the establishment of the intermediate EC, local firms in high-pollution industries face higher transition risks due to environmental policies. Their credit spreads significantly increase by about 28.4 basis points (about 12% of the average credit spreads) in our sample, indicating that improved regional environmental justice capacity promotes the capital market pricing of the transition risks induced by environmental policy. We then propose and empirically test the underlying mechanisms of the effect of EC establishment on bond financing cost. We find that the environmental rule of law enhanced by EC raises the bond financing cost of firms in high-pollution industries by aggravating the exposure of environmental litigation risks, strengthening external environmental monitoring, increasing operating costs, and sub-optimizing resources allocations in operating activities. Further analysis finds that the impact of EC establishment on bond financing costs is greater in the sample with better legal environments and stronger government incentives for environmental governance. To address the endogeneity of EC establishment, we adopt the propensity score matching method, control for more regional characteristics, add more fixed effects, and investigate the dynamic impacts of EC establishment. In addition, the conclusions remain robust to the use of alternative measures of high-pollution firms, the use of two-way clusters, and the consideration of bond types.
This paper contributes to several strands of literature. First, based on prior literature on the economic effects of environmental regulation, this study provides empirical evidence on how regional environmental justice capacity enhancement promotes the green-oriented function of capital markets. Second, this paper supplements the pricing mechanisms of firms' transition risks under the construction of environmental rule of law. Third, the paper contributes to the literature on law and finance from the perspective of promoting environmental justice efficiency.
This paper has important policy implications in the pricing of transition risks and the construction of environmental justice under the process of carbon emission peak and carbon neutrality. Strong protection of environmental rule of law plays an important role in promoting long-term coordination of policy guidance and financial markets' operation, and cultivating green investment philosophy and ability. Under advanced regional environmental rule of law represented by the establishment of EC, firms need to promptly prevent and resolve transition risks and improve environmental performance to achieve comparative competitive advantages in the new era of high-quality development. In the future, the effects of environmental rule of law on improving ecological governance and accelerating the green transformation of the economy should be further strengthened in the joint efforts of legislation, justice, law enforcement, government, and public concerns.
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Received: 28 June 2021
Published: 01 January 2022
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