Foreign bank entry and corporate emissions: Evidence from staggered deregulations in China

In this study, we estimate the impact of staggered foreign bank entry deregulation in China on corporate emissions. We find that firms significantly reduce their emissions following the entry of foreign banks. This impact is more concentrated in financially constrained and bank dependent firms, as well as firms with severe ex-ante agency costs. Firms exposed to high environmental litigation risk, facing less local economic pressure to meet growth targets and located in areas with lower ex-ante banking competition also show a significant reduction in emissions post-foreign bank entry deregulation. Moreover, our investigation shows that foreign bank entry contributes to corporate emissions reduction through the adoption of pollution abatement equipment and green technologies. Overall, we uncover new evidence on the impact of foreign bank entry on social welfare outcomes, thereby expanding our understanding of the role of financial market openness in moving toward a low-carbon economy.