The causal effect on firm performance of China's financing–pollution emission reduction policy: Firm-level evidence

Abstract

The relationship between pollution emissions and economic development matters greatly to sustainable growth goals. China has experienced rapid growth in pollution emissions, energy consumption, and the effects of climate change. To achieve pollution reduction and energy savings targets, China's green loan policy implements a financing–pollution emissions reduction strategy for Chinese firms. Employing a difference-in-difference estimation method, we use Jiangsu Province manufacturing firm data for the period 2005 to 2013 to evaluate the effect of financing–pollution emission reduction policy tools on firm performance. Our analysis yields the following results. First, the financing–emission reduction policy has a “punishment” effect on highly polluting firm performance, including total factor productivity, profitability, and sales growth. Second, we find that these negative effects are weakened in dynamic processes. Further, pollution emissions are significantly reduced. Third, financial constraints act as the mechanism through which firm performance is punished, via the financial–emission reduction policy. Short-term and long-term bank financing decrease, while working capital and trade credit are increased to finance investment. Finally, with regard to ownership structure, state-owned firm performance is more likely to be penalized than other forms of ownership.