The paper entitled “Greening Through Finance?”, which was co-written by our school’s Associate Professor Yuchao Peng, Professor Haichao Fan, a young teacher of Fudan University, Professor Huanhuan Wang, a young teacher of East China Normal University, and Associate Professor Zhiwei Xu, a young teacher of Shanghai Jiao Tong University, has been officially accepted by the Journal of Development Economics, an international top-tier (AAA) journal in the field of development economics.
In this research, the authors intend to find out how financial markets internalize the potential adverse cost of a firm’s environmental credit risk on the margins of a borrowing firm and how the increased loan costs further affect firms’ economic and environmental performance. With strengthened green credit regulations, banks raise loan interest rates to non-abatement firms in a simple theoretical model. Firms that were formerly indifferent to pollution abatement must re-determine their abatement and borrowing strategies.
It is found that: First, the strengthening of green credit regulation after 2012 explains a 10.2% increase in the floating ratio of the loan rate for firms with non-compliance records relative to their law-abiding counterparts; second, tests for heterogeneity show the effects to be more pronounced for POEs and small firms; third, concerning business performance, large punished firms experience a relatively smaller decrease in liabilities, total assets, fixed assets, investments, and operational performance, compared with small punished firms. However, there is no observable difference about the impact on profits of firms varied by their sizes; and fourth, when it comes to the environmental performance, although all of these firms reduced their pollution emissions, how the reductions were realized is dissimilar: large firms place a large proportion of their investment into emission control by, for example, adopting more abatement facilities, while small firms choose to produce less. Stated differently, upon the green loan regulations, the large non-compliant firms responsively upgrade pollution cleaning technology, thus turning green. In contrast, small non-compliant firms are forced to produce less due to fewer loans with higher costs.
The research conclusion offers a new perspective for developing countries in terms of designing a more sophisticated green loan policy and reshaping the institutional structure between the government and banks: First, to improve small firms’ environmental performance without reducing output, offering a preferential loan policy might be workable, especially helping small firms upgrade emission abatement technologies and install pollution control facilities; and second, it is essential to take into consideration the regulatory structure and the relationship between the government and backs at the time of developing green loan plans.
