Finance Enables Environmental Governance: Evidence From the Establishment of City Commercial Banks in China

ABSTRACT This paper assesses how financial development enables corporate environmental governance, based on the unique Chinese situation that China's city commercial banks (CCBs) are financial institutions financed and controlled by local city governments and aimed at providing financing services to firms under local jurisdictions. Using the successive establishment of CCBs in China as a quasi‐natural experiment, our staggered difference‐in‐differences estimation highlights findings as follows. First of all, CCBs encourage local firms to abatement, although their original incentive is reducing firm's financing costs, while their political characteristic determines this relationship. Secondly, we find that the combination of credit policy and local government's environmental goals is more conducive to firms' emission reduction, which can reduce the inhibition of environmental goals on output and enhance the pollution control capacity of regions with large fiscal gaps. In addition, we find CCBs show stronger emission reduction incentives for high‐polluting firms and capital‐intensive industries, and have greater incentive for small firms and non‐state‐owned firms with strong credit constraints to reduce emissions. Overall, this paper reveals the relationship behind the effects of CCBs and firm environmental investment in China, highlighting the cooperative relationship between the financial credit policy and local environmental governance.