Air pollution and corporate financial assets allocation: Evidence from China

Abstract

Understanding the relationship between air pollution and corporate investment strategy has significant implications for both environmental sustainability and economic development. Utilizing data from China's A-share listed companies spanning from 2014 through 2022, we investigate the causal relationship between air pollution and corporate allocation of financial assets. Using an instrumental variable approach, we find that worse air quality has a positive effect on corporate financial asset allocation. Specifically, a 1% increase in the number of air pollution days tends to result in a 0.002% increase in the share of financial assets held by firms. This effect prevails through diverse robustness tests. Furthermore, as companies encounter more stringent financing constraints and environmental regulations, the trend of air pollution promoting the increased financialization of assets becomes more pronounced. Based on the findings, this paper suggests providing more support for enterprises to facilitate the upgrading of production and operation to meet environmental standards.