Do energy policies bring about corporate overinvestment? Empirical evidence from Chinese listed companies

Abstract

In an era of profound changes in the global economic and industrial landscape, the ability of renewable energy policies to create new growth drivers is critical to achieving China's economic recovery in the post-COVID-19 period. Consequently, this paper empirically examines whether renewable energy policies bring about corporate overinvestment. Using corporate investment data and hand-curated information on energy firms from Chinese listed companies from 2007 to 2018, the results show that implementing renewable energy policies causes firms to overinvest. Renewable energy investment is more of a government-led industrial policy, reflecting how local governments increase their degree of intervention in firm investment, leading to overinvestment and better short-term firm performance. However, in the long run, the overinvestment encouraged by renewable energy policies will more negatively impact the economic performance of state-owned enterprises (SOEs). Moreover, when economic policy uncertainty is high, renewable energy policies can lead to a more pronounced tendency for firms to overinvest. Despite this trend, renewable energy policies do not significantly increase the likelihood of overinvestment among firms with high state-owned or equity concentration but instead allow firm operators to make more rational investment decisions. Thus, the government should formulate policies to regulate the investment process of enterprises and avoid distorting their investment behavior when providing financial support and preferential policies.