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Can inclusive finance curb sustainability regulatory risk for corporations?

Author

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  • Zhu, Xiaoyu (Ross)
  • Zhou, Changyun
  • Zeng, Hanzhe

Abstract

This study investigates the interplay between inclusive finance and sustainable regulatory policy in shaping corporate performance. Specifically, we examine the effects of an exogenous environmental regulation shock: the geographic designation of Biodiversity Conservation Priority Areas (BCPAs) in China. Implementing a difference-in-differences (DID) methodology, we find that firms located within BCPAs experience: 1) heightened environmental penalties; 2) intensified regulatory scrutiny; and 3) a contraction in corporate revenue. Amidst increasingly stringent sustainability mandates, we show that financial inclusion serves as a mitigating agent, attenuating adverse policy effects and restoring corporate profitability. The primary mechanism stems from the stimulation of local entrepreneurial activity facilitated by financial inclusion. Further analyses indicate that inclusive finance boosts green innovations and curtails carbon emissions at the firm level. We adopt alternative econometric models to test the robustness of our results. Overall, this paper makes a unique contribution to the literature by explicating how inclusive finance can buffer against adverse externalities of sustainable policy and provides insights for policymakers and corporate managements.

Suggested Citation

  • Zhu, Xiaoyu (Ross) & Zhou, Changyun & Zeng, Hanzhe, 2025. "Can inclusive finance curb sustainability regulatory risk for corporations?," Research in International Business and Finance, Elsevier, vol. 77(PA).
  • Handle: RePEc:eee:riibaf:v:77:y:2025:i:pa:s0275531925001576
    DOI: 10.1016/j.ribaf.2025.102901
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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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