Dissipation of Debt Financing Privilege on Corporate AI Washing: Evidence from China

TL;DR

This paper investigates how policy shocks in China affect debt costs for firms engaging in AI washing, revealing increased financing costs and market discipline effects.

Contribution

It introduces a novel proxy for AI washing and demonstrates the impact of policy shocks on debt financing costs in an emerging market context.

Findings

AI washing firms face a 12.5 basis point increase in debt costs after policy shocks.

Management shareholding and analyst attention intensify the penalty.

Supply chain concentration and bank proximity weaken the penalty.

Abstract

The rapid development of artificial intelligence motivates firms to engage in AI washing. This study examines whether strategic policy shocks increase debt financing costs for such firms. Leveraging China's 14th Five Year Plan as a quasi natural experiment, we identify AI washing through the residual between AI narrative intensity and patent output. External validation confirms this decoupling reflects strategic deception evidenced by subsidy extraction and future regulatory violations rather than benign ambition, supporting its validity as an AI washing proxy. Difference in differences estimations reveal that AI washing firms experience a 12.5 basis point relative increase in debt financing cost afterward. Joint estimation confirms simultaneous adjustments across financing and innovation margins. Management shareholding and analyst attention amplify the penalty while supply chain concentration and bank proximity attenuate it. Results remain robust across checks. Our findings illuminate how macro level policy shocks activate market discipline in emerging market debt markets.