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Where should the money go? The green effect of governmental guidance when sustainable finance impacts brown firms

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  • Zhang, Cheng
  • Zhou, Bo

Abstract

Financial institutions are still struggling to decide which brown firms should be funded by sustainable finance. Building on China's practice in central bank guidance, this study proposes that government can direct financial institutions as to which brown enterprises should be funded. This governmental guidance would expand the firm-level effectiveness of sustainable finance. The analysis of Chinese listed firms during 2011–2019 demonstrates that the government guidance-covered brown firms significantly increased their expenditure on environmental protection. The finding remained robust after a battery of checks, and was particularly notable among state-owned, larger-sized, and initially fund-constrained firms. We further find that the covered brown firms saw a notably increase in bank credits. In order to increase the green impact of sustainable finance, we recommend a greater government involvement in guidance.

Suggested Citation

  • Zhang, Cheng & Zhou, Bo, 2023. "Where should the money go? The green effect of governmental guidance when sustainable finance impacts brown firms," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:pacfin:v:78:y:2023:i:c:s0927538x23000276
    DOI: 10.1016/j.pacfin.2023.101961
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