Using Green Finance to Improve the Environmental Performance an Investigation of China's Pre-Ipo Environmental Inspection Policy

Abstract

This paper evaluates the effectiveness of China’s pre-IPO environmental inspection policy, an innovative green finance initiative combining central inspections with public disclosure of policy compliance. Our theoretical frameworks hypothesise that centralised pre-IPO environmental inspection improves a firm’s environmental performance, while public access to policy compliance information makes consumers more informed about a firm’s environmental attributes which can increase demand for a firm’s products and lead to greater profitability. We test the validity of our theoretical hypotheses using a unique dataset of 580 listed firms in China from 2009 to 2014. Our results suggest that policy compliance does not reduce firm economic performance in the short term and, in some cases, increases long-term profits while at the same time helping firms to improve their environmental performance. More specifically, for pollution-intensive firms, we observe that although the market takes longer to respond to the signal of policy compliance, firm competitiveness is maintained in the longer term. Our findings highlight that a well-designed policy mix that carefully combines different instruments can lead to economic and environmental benefits.

Keywords: green finance, environmental regulations, Firm Performance, asymmetric information, China