Environmental regulatory spillovers in conglomerates: Quasi-experimental evidence on subsidiary leverage in China

Using China’s Eleventh Five-Year Plan as a quasi-experiment, we investigate intra-firm financial spillovers from SO2 emissions reduction targets. In a triple-differences framework with matched parent-subsidiary data, we find that subsidiaries reduce financial leverage by 8.64% per 10 percentage point increase in parent targets. This is driven by higher debt costs as lenders price parent-side risks. Effects are concentrated among financially constrained parents and in short-term liabilities. In contrast, neither unconstrained parent exposure nor direct subsidiary exposure yields systematic effects. Our findings reveal an indirect transmission channel for regulatory effects to unregulated affiliates. They extend prior work on operational spillovers within conglomerates by documenting balance sheet adjustments that could amplify financial vulnerabilities. This contributes to environmental economics by highlighting how conglomerate structures may mediate regulatory effects. Such mediation could exacerbate systemic risks amid ongoing global green transitions.