Green credit policy and firm performance: What we learn from China

Highlights: • We explore the effect of green credit policy on firm performance in China. • Green credit policy reduces firm performance in heavily polluting industries. • This policy effect is more prominent in SOEs and large-cap firms. • This policy effect is more significant in firms with stronger external supervision. • EPU enhances the restraining effect of green credit policy. • Financial constraints and investment level play crucial economic channels. We explore the effect of green credit policy on firm performance of listed firms in China. We find that green credit policy reduces firm performance in heavily polluting industries. This effect is more prominent in state-owned enterprises, firms with large size, high institutional ownership, high analyst coverage and during high economic policy uncertainty period. Moreover, we observe that green credit policy decreases heavily polluting firms' performance by increasing firm financing constraints and decreasing investment level. Our results help to restrain heavily polluting enterprises and promote industrial transformation in developing markets.