Less Pollution, Fewer Crashes: The Impacts of Green Credit Policy on Stock Price Crash Risk

Posted: 16 Jun 2021

See all articles by Mingfa Ding

Mingfa Ding

Central University of Finance and Economics (CUFE) - Chinese Academy of Finance and Development

Yikai Han

Central University of Finance and Economics (CUFE)

Mi Shen

Central University of Finance and Economics (CUFE) - Chinese Academy of Finance and Development

Rui Zhong

The University of Western Australia - UWA Business School

Date Written: June 15, 2021

Abstract

We use the implementation of “Green Credit Guidelines” as a quasi-natural experiment to examine its impact on high-pollution firms’ stock crash risk. By applying a Difference-in-Difference (DiD) model to a sample of Chinese listed firms from 2009 to 2016, we document that high-pollution firms’ stock crash risk increase significantly after the passage of the policy. Channels to explain the association are investigated. Since high-pollution firms are less likely to receive the “green credits”, their financial constraints increase. It motivates these firms to hoard more firm-specific negative information and as a result, high-pollution firms are covered with fewer analysts, attract less media attention, and are more likely to be shorted after the policy. The increased information asymmetry between the corporations and the investors lead to a higher level of crash risk. In addition, we show that the impact of the policy is more pronounced for high-pollution firms which are state-owned enterprises, located in areas with better legal and market environment, or in the eastern provinces. Further, our study suggests that high-pollution firms should follow the government’s initiative and transfer themselves into more environmental-friendly enterprises. By doing that, these firms could stabilize their stock prices and thus decrease the stock crash risk.

Keywords: Green Credit, Crash Risk, Information Asymmetry, DID Model

JEL Classification: G10, G14, G23

Suggested Citation

Ding, Mingfa and Han, Yikai and Shen, Mi and Zhong, Rui, Less Pollution, Fewer Crashes: The Impacts of Green Credit Policy on Stock Price Crash Risk (June 15, 2021). Available at SSRN: https://ssrn.com/abstract=3867125

Mingfa Ding

Central University of Finance and Economics (CUFE) - Chinese Academy of Finance and Development ( email )

39 South College Road
Beijing
China

Yikai Han

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Mi Shen (Contact Author)

Central University of Finance and Economics (CUFE) - Chinese Academy of Finance and Development ( email )

39 South College Road
Beijing
China

Rui Zhong

The University of Western Australia - UWA Business School ( email )

35 Stirling Highway
Crawley, Western Australia 6009
Australia

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