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Environmental credit pressure and corporate financial asset allocation: evidence from China

Lianchao Yu,Haoxiang Yang,Jinting Dong

Published 2025 in International Journal of Managerial Finance

ABSTRACT

This study employs the gradual implementation of China’s Environmental Credit Evaluation Policy (ECEP) as an exogenous shock to analyze the heterogeneous effects of credit-based environmental regulation on financial asset allocation across enterprises with distinct ownership structures – specifically, between non-state-owned enterprises (non-SOEs) and state-owned enterprises (SOEs). Using data from A-share listed companies in Shanghai and Shenzhen spanning 2008–2022, this study employs a staggered difference-in-differences (DID) design to identify causal effects. ECEP exerts divergent effects on corporate financial asset allocation across ownership structures: it increases allocation in non-SOEs while decreasing it in SOEs. This divergence is attributed to ECEP’s impact on corporate motivations: it strengthens risk-aversion and profit-seeking motives in non-SOEs, driving their increased financial asset allocation, but weakens these same motivations in SOEs, leading to reduced allocation. Confirming this behavioral pattern, ECEP reduces green investment in non-SOEs but increases it in SOEs, corresponding to an inverse effect on their financial asset allocation. Furthermore, cross-sectional analysis reveals that heightened local government environmental attention, increased local government environmental subsidies, stronger local government environmental penalties and advanced regional marketization collectively mitigate ECEP’s promoting effect on non-SOEs and amplify its inhibitory effect on SOEs. This study offers important implications for corporate managers. Strategic recalibration is essential. Non-SOE executives must reconcile short-term gains with long-term sustainability: although ECEP-driven financial asset allocation boosts immediate returns, reduced green investment jeopardizes environmental credibility and future funding access. Managers should allocate a fixed percentage of financial returns to green innovation while proactively disclosing environmental strategies to maintain stakeholder confidence. Conversely, SOE leaders should institutionalize green transition gains by embedding environmental KPIs into executive compensation to align with regulatory incentives and leveraging green asset securitization to offset liquidity pressures from shrinking financial investments, thereby funding sustainable expansion amid intensified policy synergies. This study yields critical implications for policymakers. First, ownership-specific regulatory mechanisms should be designed to address the diametrically opposite effects of ECEP: whereas non-SOEs increase financial asset allocation, SOEs reduce it. For non-SOEs, mandatory green investment thresholds should counterbalance their tendency to reduce environmental expenditures. For SOEs, incentives such as green credit subsidies or tax relief would consolidate proactive green transitions. Second, policymakers should construct synergistic policy bundles, given that heightened local government environmental attention, increased local government environmental subsidies, stronger local government environmental penalties and advanced regional marketization collectively attenuate ECEP’s positive effect on non-SOEs while amplifying its inhibitory effect on SOEs. This requires integrating ECEP with fiscal tools (e.g. tiered subsidies/penalties tied to credit tiers) and establishing market-based linkages (e.g. interest rate discounts for high-credit enterprises in developed markets) to incentivize sustainable capital allocation. This study demonstrates an ownership-differentiated effect of credit-based environmental regulation on corporate financial asset allocation. Grounded in institutional theory, it advances a theoretical framework elucidating corporate motivations and behaviors concerning financial asset allocation under environmental credit pressure. Consequently, the findings yield significant implications: policymakers should develop ownership-specific regulatory mechanisms and implement synergistic policy bundles, while corporate managers must undertake strategic recalibration to foster sustainable development.

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