The effect of China's low carbon city pilot policy on corporate financialization

Abstract

This paper investigates the effect of China's low-carbon city pilot (LCCP) policy on corporate financialization. We find that the implementation of the LCCP policy increases the level of corporate financialization, with this increase being more pronounced in firms that have lower cash holdings or are non-state-owned enterprises (non-SOEs) than in firms that have higher cash holdings or are SOEs. We also find that compared with firms not holding financial assets, firms holding financial assets can better smooth investment volatility under the influence of the LCCP policy. The asymmetry of this smoothing effect is stronger in firms that exhibit underinvestment than in firms that exhibit overinvestment, which indicates that the primary role of financial assets is to serve as a “reservoir” that buffers the negative effects of fluctuations in their returns caused by policy uncertainty and thereby prevents liquidity risk.