Government-endorsed voluntary regulation and debt financing cost: evidence from China’s green factory certification

As global finance increasingly places weight on sustainability, firms in emerging economies face a ‘green financing dilemma’ between sustainability and financial stability. This paper investigates the signalling efficacy of China’s Green Factory (GF) certification, a unique state-endorsed voluntary environmental regulation. Using a sample of Chinese listed firms from 2008 to 2023, and employing a staggered difference-in-differences (DID) approach, we find that the GF significantly reduces the debt financing cost. Mechanism tests are consistent with partial channels involving mitigated default risk, decreased information asymmetry, and enhanced reputation. Heterogeneity analysis suggests that the effect appears more pronounced for firms with higher financing dependence, stronger digitalization, and weaker mandatory environmental regulation. We further show that GF certification is associated with greater bank credit access and weaker financing constraints. Overall, our findings suggest that government-led voluntary environmental regulation may offer a useful market-based complement to green financing in emerging economies.