Death or rebirth? How small- and medium-sized enterprises respond to responsible investment

This study examines how nonlisted small- and medium-sized enterprises (SMEs) respond to the financial constraints imposed by responsible investment policies. We examined how SMEs' operational and environmental behaviors changed following China's Green Credit Policy, combining a synthetic control method with a triple difference-in-differences approach. We found that SMEs were likely to exit the market following the Green Credit Policy; however, the surviving SMEs significantly decreased their pollution. We also discovered that foreign firms and firms that received government subsidies were less susceptible to the policy and that the internal cash flow reserves of larger firms hardly changed, while that of SMEs significantly decreased after the policy. This indicates that for some SMEs with relatively poor environmental performance, there is not so much a lack of sufficient financing but rather the absence of strong incentives to change. Thus, financing constraints can stimulate a strong incentive to improve firms' environmental performance.