Does Corporate Environmental Investment Impede Financial Performance of Chinese Enterprises? The Moderating Role of Financial Constraints

Abstract

<title>Abstract</title> China has emerged as the world’s largest pollutant emitter due to rapid industrialization and a remarkable economic upsurge in recent decades. Rising carbon emissions have exerted more social and regulatory pressure on Chinese corporations to undertake environmental protection investments. However, the implications of such investments on the financial fundamentals of a firm remain unclear. Especially little is known about how environmental protection investments affect the performance of financially constrained firms. This study explores the mediating role of financial constraints in the nexus between corporate environmental protection investment and the accounting and market performance of Chinese listed firms during 2009–2016. The empirical outcomes of the generalized method of moments (GMM) based regressions reveal that environmental investments of non-constrained firms have a positive impact on the accounting and market performance of such firms measured by ROA and Tobin's q respectively. Interestingly, environmental protection investments have a significant negative association with both the accounting and market performance proxies of firms that are facing financial constraints. These findings imply that in pursuit of environment preservation and pollution abatement, policymakers shall provide more financial flexibility and enabling environment to financially constrained firms to optimize their role in pollution abatement.