One Firm's green, another Firm's mean: Green factory certification and corporate debt costs

Abstract

Voluntary Environmental Programs (VEPs) encourage firms to exceed regulatory compliance by adopting sustainable practices, yet their broader economic implications remain underexplored. This study examines the effects of China's Green Factory Certification Program—a government-led VEP targeting the energy-intensive industrial sector—on firms' cost of debt, with a focus on both participants and non-participants. Using a staggered difference-in-differences methodology and a sample of A-share listed manufacturing firms from 2012 to 2022, we find that this program reduces debt financing costs for certified firms. However, non-participants experience an adverse spillover effect: as the number of certified peers in the same city increases, their borrowing costs rise. This “shadow effect” suggests financial institutions redirect resources toward certified firms, creating competitive disadvantages for non-certified entities. Our analysis reveals that the program's benefits are most pronounced for certified firms with weaker initial environmental reputations, while the negative spillovers are more severe for non-participants facing greater competitive pressure. Additionally, political connections amplify the program's effects, enabling certified firms to secure greater financing advantages while exacerbating disadvantages for non-certified competitors. Finally, we find that the program improves certified firms' long-term stock returns, whereas non-participants with many certified peers suffer diminished performance. These findings highlight the dual impact of VEPs, underscoring their potential to enhance firm-level outcomes while reshaping market dynamics through resource reallocation and competitive pressures.