Do financial constraints curb firms' efforts to control pollution? Evidence from Chinese manufacturing firms

Financial constraints have long existed in China's manufacturing sectors. The growth of the manufacturing sector has been slowing in recent years due to increasingly strict environmental regulations that force factories to cut production. In this study, we discussed whether financial constraints were essential in firms' decision to control pollution, and matched the Annual Surveys of Industrial Firms dataset with the Ministry of Environmental Protection survey data on firms' expenditures in industrial waste gas emission control. The relationship between calculated investment-cash flow sensitivity (ICFS) and the environmental investment ratio (the ratio of firms' expenditures on pollution control to total assets) was analyzed. We found that, overall, financial constraints had a significantly negative effect on firms' efforts to reduce waste gas emission. State-owned enterprises (SOE) relieved financial pressure mainly by seeking external financing sources to reduce emission. On the other hand, private-owned (POE) and foreign-owned enterprises (FOE), if efficiently financed internally, can reduce waste gas emission by increasing investment in waste gas treatment. This study provided a quantitative analysis on firms' financial constraints in environmental protection investment, contributing to the development of effective government policies on related issues in China. (C) 2019 Elsevier Ltd. All rights reserved.