Actions speak louder than words: Can credible green commitment facilitate bank loan financing? Evidence from China

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Abstract

Our study investigates whether credible commitment to corporate green behaviours influences corporate finance. Specifically, using the unique setting Green Manufacturing (GM) program in China, we examine whether and how green manufacturing certification (GMC) endorsed by the government could lead to an increase in firms' bank loan financing. We find that GMC increases bank loan financing, mainly through alleviation of banks' concerns of information risk and default risk potentially arising from environmental risk. Heterogeneity analyses show that the positive effect of GMC on bank loan financing is more pronounced for non-state-owned enterprises, firms in polluting industries, in less eco-friendly regions, and in Green Finance Pilot Program regions. Our findings suggest that the government plays an important role in discerning and endorsing corporate green behaviours, and thus directing banks' financial resource allocation decisions.

Evaluation of Fair Value Relevance and Sensitivity to Valuation Assumptions

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This paper evaluates whether the relevance of investment properties measured using Level 3 inputs is impacted by the assumptions underpinning the determination of fair values. Evidence is provided of investors generally finding investment property fair values determined with Level 3 inputs to be relevant, and the values are not discounted in market price. However, this is not the case when there is evidence of firms using optimistic assumptions in the determination of fair values. Specifically, there is a material price discount of recognized investment property values as well as fair value gains for these observations. Our research setting of real estate investment firms has several advantages as these firms typically have as their major assets investment properties whose fair value and rental income can be observed from financial reports. This allows investors to easily infer and compare the key valuation assumptions as captured by the capitalization rate. The implication for more general circumstances where valuation assumptions cannot be inferred from financial reports is that detailed disclosures of assumptions are necessary for users to assess the reliability of fair values determined with Level 3 inputs.

Central bank communication and macro information in analyst forecasts: Evidence from Chinese listed firms

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Abstract

The paper examines how central bank communication affects the macro information in analyst forecasts. Using quarterly data of Chinese-listed firms from 2007 to 2018, we find that richer and more frequent central bank communication increases the macro information contained in analyst forecasts. This effect is realized through the employment of in-house economists by security firms. In addition, we document that the effect of central bank communication on macroeconomic information in analyst forecasts is more salient under a contractionary monetary policy regime, during a bear market, or when the economic policy is more uncertain. We also show that analyst forecasts are more sensitive to central bank communication when firms that they follow are state-owned enterprises, have larger leverage ratios, or are located in more developed regions. In addition, analyst forecasts are more susceptible to central bank communication when the communication is in an informal oral format, when the public has more trust in the credibility of the central bank communication, and when the central bank pays more attention to expectation management after 2010. Finally, we show that richer and more frequent central bank communication also improves the accuracy of analyst forecasts.

How does ESG performance impact corporate outward foreign direct investment?

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Abstract

In recent decades, environmental, social, and governance (ESG) factors have received increasing attention in the literature of corporate internationalization. While prior studies have extensively examined how ESG initiatives implemented in the host country enhance corporate international performance, less attention has been paid to the facilitating role of previously accumulated ESG performance in the internationalization process. Drawing on a sample of 2083 unique publicly listed Chinese firms from 2010 to 2019, we explore whether and how ESG performance promotes corporate outward foreign direct investment (OFDI). Our findings indicate a positive association between corporate ESG performance and both the propensity and scale of OFDI. We also identify financial constraints and corporate reputation as two mechanisms through which ESG performance influences OFDI. Our additional analysis suggests that the reputation-strengthening mechanism of ESG performance is more pronounced for family firms, whereas no significant difference is observed between family and nonfamily firms in terms of the financial mechanism. These findings have important implications for managers and policymakers seeking to promote sustainable development and internationalization.