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How does green credit policy affect polluting firms' dividend policy? The China experience

Journal: International Review of Financial Analysis

Date: 2023

Author: Youwei Li, Ming Liao, Yangke Liu

Abstract:
We explore how polluting firms alter their dividend policy in response to pressure from green credit policy. The green credit guidelines that China adopted in 2012 aim to promote credit supply in sustainable development. Meanwhile, this green credit policy forced polluting firms to access restricted credit supply and tightened bank monitoring. Using the adoption of the green credit policy as a quasi-natural experiment, we find that polluting firms tend to lower their dividend payments, consistent with the view that dividends act as an effective tool of liquidity management and a substitute to mitigate agency problems. This finding is more pronounced among firms with weaker corporate governance, greater financial constraints, and more green innovation output. Our further analysis suggests that the green credit policy forces polluting firms to engage in less dividend smoothing.

Link: Google Scholar

Background and Context

Policy Background

In 2012, China adopted green credit guidelines requiring banks to increase lending to environmentally friendly projects while restricting credit to polluting firms.

Research Question

This study examines how polluting firms adjust their dividend policies in response to reduced credit supply and increased bank monitoring following the green credit policy implementation.

Methodology

The research uses a difference-in-differences analysis comparing dividend policies of polluting versus non-polluting firms before and after the 2012 policy implementation, using data from 2,788 Chinese listed companies from 2007-2017.

Significant Reduction in Dividend Payouts for Polluting Firms

Polluting firms reduced dividend payouts by 15.38% after the green credit policy implementation
The decline reflects firms' response to restricted credit access and increased bank monitoring
This finding is both statistically significant and economically meaningful

Impact on Bank Lending to Polluting Industries

Banks significantly reduced total lending to polluting firms by 2%
Long-term loans decreased by 1.8% while short-term loans remained relatively stable
The shift in lending patterns indicates stricter monitoring of polluting firms

Increased Impact on Firms with Weak Corporate Governance

Firms with weaker corporate governance showed larger reductions in dividend payouts
Each governance weakness factor contributed to an additional 0.2% reduction in dividends
Results suggest bank monitoring becomes more important when internal governance is weak

Changes in Alternative Financing Sources

Polluting firms increased cash holdings by 1.2% and supplier financing by 0.4%
Bond issuance decreased by 0.3% and overall financial leverage fell by 1.2%
Shows firms' adaptation to reduced bank credit through alternative financing sources

Reduced Dividend Smoothing Behavior

Polluting firms showed 11.9% less dividend smoothing after policy implementation
Indicates reduced ability to maintain stable dividend patterns
Suggests enhanced bank monitoring reduced the need for dividend signaling

Contribution and Implications

First study to document how environmental policy affects corporate dividend decisions
Demonstrates how green credit policies can influence firm financial behavior beyond just lending patterns
Provides evidence that environmental regulations can have significant effects on corporate financial policies
Offers insights for policymakers considering similar environmental lending policies

Data Sources

Dividend impact analysis based on Table 2 regression results
Bank lending changes derived from Table 9 Panel A
Corporate governance effects from Table 7 coefficients
Alternative financing analysis based on Table 9 Panel B
Dividend smoothing behavior from Table 10 regression results