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The unintended consequence of environmental centralization: Evidence from firm financialization

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  • Qi, Minhao
  • Liu, Yuxin
  • Hu, Changlong
  • Yang, Zhijiu

Abstract

This study examines the influence of environmental re-centralization, specifically the Vertical Management Reform (VMR) in China, on the investment decisions of polluting firms. Using a staggered difference-in-differences approach, we find that the VMR significantly increases the allocation of resources to financial assets by 12.7 %, accelerating the financialization of polluting firms. The mechanism analysis shows that environmental centralization enhances regulatory enforcement and reduces governmental support, tightening corporate financial constraints. The motivation for firm financialization can be explained by investment substitution rather than precautionary savings. We further show that private firms, firms with more tightened financial constraints and firms with fewer assets become more financialized following the centralization reform. Moreover, the impact on firm financialization diminishes with the distance from provincial capital cities. We reveal the unintended consequence of environmental centralization on firm financialization and provide meaningful implications for changes in institutional arrangements.

Suggested Citation

  • Qi, Minhao & Liu, Yuxin & Hu, Changlong & Yang, Zhijiu, 2024. "The unintended consequence of environmental centralization: Evidence from firm financialization," International Review of Financial Analysis, Elsevier, vol. 96(PB).
    • Handle: RePEc:eee:finana:v:96:y:2024:i:pb:s1057521924006239
    DOI: 10.1016/j.irfa.2024.103691
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