Voluntary environmental regulation policies and the cost of equity capital: Evidence from China's “Green Factory” policy

Abstract

Government-led voluntary environmental regulations are vital instruments for enhancing modern environmental governance systems and promoting green industrial transformation. In this paper, we investigate the impact of voluntary environmental regulations on corporate cost of equity capital based on a quasi-natural experiment involving China’s “Green Factory” certification policy. The findings reveal that firms listed as “Green Factories” experience a significant reduction in investor risk expectations, reflected in a decrease in the cost of equity capital. Mechanism analysis suggests that “Green Factory” certification primarily impacts equity capital costs through two channels: reducing information and governance risks. Cross-sectional tests indicate that, considering internal governance mechanisms, the effect of “Green Factory” certification on equity capital cost is more pronounced among firms with stronger internal controls; considering external oversight mechanisms, the effect is mainly concentrated in firms with higher levels of media and investor attention. Overall, this study provides important empirical evidence for evaluating the effectiveness of voluntary environmental regulation, advancing green manufacturing, and building modern environmental governance frameworks.