The effect of economic incentives on corporate environmental investment: Evidence from Chinese manufacturing listed firms

Abstract

Different from most studies that analyze command-and-control policies, our paper quantitatively evaluates the effectiveness of one type of economic incentive – environmental subsidies for stimulating corporate environmental investment. Using a representative sample of Chinese manufacturing listed firms, we find that environmental subsidies provided by the government significantly increase corporate environmental investment. The effect of environmental subsidies is also higher for smaller firms and private firms. Moreover, we also find that environmental subsidies have a significant and positive effect on both cleaner production and end-of-pipe investment, with the effect on cleaner production being greater. Further exploration reveals that government subsidies are a signal of endorsement that contributes to increments in firms’ innovation and financial capacity, which encourages an increase in corporate environmental investment.