Blue Sky Protection and Corporate Financing Decisions– Evidence from Ultra-low Emission Standards Policy

In this study, we examine the impact of an investment-oriented environmental policy on corporate financing decisions that linked to sustainable production. Analyzing a large sample of Chinese manufacturing firms between 2009 and 2018, we determine that strengthened environmental protection causes higher financial leverage. Using an exogenous regulatory shock, we show that regulated firms are more likely to increase debt ratios following the introduction of an ultra-low emission standards policy in China. This impact is stronger in firms with lower levels of government ownership, fewer financial constraints, those operating in low-polluting industries, and those with less reliane on trade credit. Channel analysis reveals that China’s ultra-low emission standards policy significantly increases firms’ capital expenditure, motivating them to issue more debt to meet immediate and short-lived cash needs. Our study offers evidence that investment-oriented legislation leads to higher corporate financial leverage, providing insights for both policymakers and businesses regarding such operational risk.