Description:
This paper evaluates the effectiveness of China’s pre-IPO environmental inspection policy, which is an innovative green finance initiative that combines inspections with public disclosure of policy compliance. Our theoretical model proposes that public access to environmental policy compliance information means that consumers are more informed about a firm’s environmental attributes which in turn changes the demand for the product, and can increase profits. We test the model using a unique dataset of 580 listed firms in China from 2009 to 2014. Our results suggest that policy compliance does not reduce firm performance in the short term and, in some cases, can increase long-term profits while at the same time helping firms to improve their environmental performance. In particular, when we look at pollution-intensive firms, we observe that although the market takes longer to respond to the signal of policy compliance, it can maintain firm competitiveness in the long term. Our findings highlight that a well-designed policy mix that carefully combines different instruments can lead to economic and environmental benefits