Carbon risk and the cost of equity capital: Evidence from China

This study investigates the relationship between carbon risk and the cost of equity capital, with a focus on the mechanisms through which carbon risk affects financial outcomes. Our findings reveal that the carbon emissions significantly increase the cost of equity capital, primarily through three channels: information asymmetry, cash flow volatility, and agency conflicts. We also find that low-carbon pilot policies reduce the carbon risk premium by increasing companies' green innovation efficiency and performance. Additionally, out results show that carbon emissions aggravate companies' financing difficulties, leading to a reduction in capital investment and promoting firms to adopt a geographic diversification strategy. Our study provides new insights into carbon risk mechanisms and the role of carbon policy interventions, offering implications for both investors and policymakers concerned with climate change's financial impacts.