Rushing through the clouds, or waiting to die? The effect of the green credit policy on heavily polluting firms

Since the 2012 issuance of the Green Credit Guidelines by the Chinese government, banks have adjusted their credit lines for heavily polluting firms. Using the data of listed companies operating in China from 2010 to 2018, this paper examines the promulgation of the green credit policy as a quasi-natural experiment, empirically tests the effectiveness of this policy on heavily polluting firms, and examines the response of firms to this policy. The paper shows that the green credit policy has reduced corporate external financing and increased internal working capital to overcome financial challenges; and that the response of heavily polluting firms to the policy is mixed, with increases in both illegal pollution and green innovation.