Green credit policy and investment-cash flow sensitivity: Evidence from a quasi-natural experiment

The green credit policy (GCP) in China aims to achieve green development by reducing credit allocations to heavily polluting enterprises. Using the implementation of the GCP as a shock to the cost of external financing, we conduct a difference-in-differences approach and find that the investment-cash flow sensitivity of heavily polluting enterprises increases significantly after the implementation of the GCP. The effect is more pronounced in firms with high investment opportunities and high financial leverage and in firms without ownership in commercial banks. Our paper provides new insights into the impact of the GCP on financial constraints and contributes to the investment-cash flow sensitivity debate by using an exogenous shock to measure financial constraints. The results suggest that investment-cash flow sensitivity may be a reasonable indicator of financial constraints in the context of China.