Where there is policy, there is strategy: The impact of a green credit policy on the debt allocation strategy of business groups

Abstract

The literature on the relationship between green credit and firms' financing strategy focuses largely on standalone firms. Our study extends this literature by examining business groups, focusing on whether and how business groups respond to green credit by proactively adjusting their financing strategy–intra-group debt allocation. Using the promulgation of China's new green credit policy as a quasi-natural experimental setting, our results show that business groups in high–energy consumption sectors have responded to the green credit policy by strategically centralizing borrowing at the parent level, and increased financial constraints and financing costs owing to green credit serve as the mechanisms underlying this causal effect. Analyses on firm heterogeneity illustrate that this effect is more pronounced in groups with private ownership and those without political or bank connections. Moreover, group debt centralization is found to mitigate the negative effects of green credit on R&D investments and investment efficiency. We further document that business groups in high-energy consumption sectors have reduced their carbon emissions since the EECG, and this effect only exists for those without financial constraints. Our study offers a finer-grained understanding of business groups' strategic responses to green credit and sheds new light on the efficiency of their internal capital markets.