Environmental Regulation and Financial Reallocation: Evidence from China’s Incentive Penalty Policy
Environmental Regulation and Financial Reallocation
DOI:
https://doi.org/10.66529/agripat.2026.2.3.95Keywords:
Environmental regulation, Incentive-penalty policy, Corporate investment, Financial reallocation, Staggered difference-in-differences, Green finance, Financial constraintsAbstract
This study examines the causal effects of China’s Environmental Compensation Incentives and Penalties (ECIP) policy on corporate investment and financial behavior using panel data from Chinese A-listed firms (2013–2024) and a staggered difference-in-differences approach. The results show that ECIP significantly reduces corporate investment intensity and cash holdings while improving short-term profitability and operating cash flows. Mechanism analysis indicates that these outcomes are driven primarily by financing constraints and internal financial reallocation rather than productivity improvements, challenging the conventional Porter Hypothesis. Heterogeneity analysis reveals stronger effects among firms with limited pre-policy cash reserves, suggesting that financially constrained firms bear a disproportionate adjustment burden. Event-study and placebo tests confirm the robustness of the findings. Overall, although ECIP enhances short-term financial discipline, it may discourage long-term investment and intensify financial pressure. The study recommends complementary green finance initiatives and differentiated compliance mechanisms to mitigate the unintended financial consequences of environmental regulation while supporting sustainable corporate growth.
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