Climate policy and firm cross-regional investment: Evidence from China

This study investigates the causal impact of regional climate policy on corporate cross-regional investment location choices in China. Exploiting the quasi-experimental shock of the Low-Carbon City Pilot program through a staggered difference-in-differences method, we find that the policy implementation significantly reduces the Mergers and Acquisitions activities targeting firms in regulated cities. In addition, firms within regulated regions exhibit a higher propensity to establish subsidiaries in non-regulated regions, reflecting strategic relocation to mitigate regulatory risks. One potential explanation is that the climate policy introduces region-specific uncertainty, amplifying investors' and managers' risk perceptions regarding climate transition exposure in regulated areas. Heterogeneity analysis reveals that the effects are more pronounced in firms with lower information disclosure quality, entrenched management, financial constraints, and firms under non-high-tech industries. Our findings highlight unintended consequences of climate policy, and provide timely policy implications for central regulators in developing economies to balance environmental objectives with firms' adaptive investment behaviors when designing place-based climate policies.