Credit availability and corporate risk-taking: evidence from China's green credit policy

Using data for firms publicly listed in China A-share markets during 2008 and 2019, this study is one of the first to treat Green Credit Guidelines implemented by the government in 2012 as a quasi-natural experiment and construct a difference-in-differences (DID) model to empirically examine the impact of credit availability on corporate risk-taking. Our study finds that credit restrictions on heavily polluting firms reduce their risk-taking behaviour, and the impact is more pronounced on small firms, non-state-owned enterprises, firms without institutional investors or firms located in low marketisation regions. In addition, our study demonstrates that credit restrictions increase financing constraints and reduce investment levels, which leads to less corporate risk-taking. Furthermore, our research shows that credit restrictions increase the cost of debt and reduce investment value and development capacity for firms in energy intensive and high pollution industries. An important implication is that to effectively curb the expansion of heavily polluting industries and promote environmental transformation, green credit policies should target small firms, firms with less state and institutional ownership as well as firms located in regions with poorer institutional reform.