Integrity atmosphere and the cost of equity: Evidence from China

Abstract

This study investigates how the integrity atmosphere in a firm's local area affects the firm's cost of equity. Using the Credit Demonstration City Construction program in China as a quasi-natural experiment, we find that firms headquartered in pilot cities enjoy lower equity financing costs following implementation of the program. The results can be attributed to improved information-disclosure quality, decreased agency costs, and better corporate social responsibility performance. Further analyses show that the reduction in the cost of equity is significant for firms whose monitoring environments are weak and those that operate in industries that depend heavily on equity financing.