The impact of carbon emission trading system on the implied cost of equity capital

Employing 9,809 firm-year observations among 2,116 Chinese A-share listed firms from 2009 to 2020, this paper explores the impact of the carbon emission trading system (ETS) on the implied cost of equity capital ( ICOC ). Our difference-in-differences analysis shows that ETS significantly increases ICOC for firms in the pilot areas. We further find that this effect is induced by technology innovation and tax avoidance. The positive relationship between ETS and ICOC is more significant among firms with smaller market cap, more severe financing constraints, and no political affiliation. In addition, we provide evidence that media attention plays a positive role in curbing firms’ tax avoidance behavior of shifting social costs under ETS. Our study uncovers the profound impact of ETS on firms, which holds significant theoretical and practical implications.