Applied Economics

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Will carbon emission trading scheme affect

industrial investment? Evidence from China’s listed
companies

Haotian Zheng, Caiyun Zhang & Xiaoxi Zhang

To cite this article: Haotian Zheng, Caiyun Zhang & Xiaoxi Zhang (13 Jun 2024): Will carbon
emission trading scheme affect industrial investment? Evidence from China’s listed companies,
Applied Economics, DOI: 10.1080/00036846.2024.2364119

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APPLIED ECONOMICS
https://doi.org/10.1080/00036846.2024.2364119

Will carbon emission trading scheme affect industrial investment? Evidence from
China’s listed companies
a
Haotian Zheng , Caiyun Zhangb and Xiaoxi Zhangb
a
School of Economics, Nankai University, Tianjin, China; bInstitute of Economics, Chinese Academy of Social Sciences, Beijing, China

ABSTRACT KEYWORDS
Using data from A-share listed companies in China spanning the years 2008 to 2020, this study Carbon emission trading
constructs a Staggered Difference-in-Differences (DID) model to estimate the influence of the scheme; industrial
Carbon Emission Trading Scheme (ETS) on industrial investment, based on signalling theory, investment; environmental
performance; market value;
financing constraint theory and capital structure theory. The main findings are summarized as
Staggered DID
follows: Firstly, the implementation of ETS is observed to enhance industrial investment levels
within listed companies located in pilot areas. This finding is confirmed through a series of JEL CLASSIFICATION
robustness tests that further validate its credibility. Secondly, the analysis of mechanisms reveals O13; P28; Q56
that the positive effect of ETS on industrial investment is due to its ability to improve the
environmental performance and market value of listed companies. These findings provide empiri­
cal evidence and valuable insights for assessing the efficacy of environmental regulation policies
and refining the ETS framework.

I. Introduction
2023; Wang et al. 2023). However, despite the crucial
From 1998 to 2021, global carbon emissions surged role of industrial investment in economic growth
from 24.15 billion metric tons to 36.3 billion metric (Anderson 1990; Bakari 2017; Podrecca and
tons.1 Without a significant shift towards the wide­ Carmeci 2001; Yu 1998), existing research on the
spread adoption of low-carbon energy sources, glo­ impact of carbon trading policies on micro-market
bal temperatures are expected to continue rising entities has yet to address the level of industrial
over the next two decades. An effective strategy is investment in companies. Therefore, there is
the introduction of carbon trading mechanisms. The a need for literature that examines the mechanism
Carbon Emission Trading Scheme (ETS) establishes by which ETS affects industrial investment from
an initial limit for carbon emissions rights through both theoretical and empirical perspectives. This
a quota system, utilizing market trading to interna­ paper explores how ETS impacts industrial invest­
lize the externalities of excessive emissions (Zheng ment through two mechanisms – environmental
and Zhang 2023). Policymakers need to understand performance and market value – grounded in sig­
the economic impact of ETS to improve the policy. nalling theory, financing constraint and capital
This paper assesses the impact of ETS on industrial structure theory. Additionally, it addresses the endo­
investment at the micro level, providing theoretical geneity issue inherent in this research, providing
framework and empirical evidence on how to har­ a rigorous explanation for studies in this field.
ness market mechanisms to achieve a win-win situa­ This study offers several potential contributions
tion for both the economy and the environment. and innovations. Firstly, this paper investigates the
Carbon markets regulate the negative externalities impact of ETS on industrial investment from
of carbon emissions and produce spillover effects on a micro perspective with the Extended Two-Way
company innovation, industrial upgrading, and var­ Fixed Effects (ETWFE) (Wooldridge 2021). The
ious aspects that can influence company value, pro­ results indicate that ETS significantly and robustly
duction efficiency, and financial performance (Jia promotes industrial investment. Subsequently, this

CONTACT Caiyun Zhang [email protected] Institute of Economics, Chinese Academy of Social Sciences, Beijing 100836, China
1
The data of carbon emission sourced from the International Energy Agency (IEA).
Supplemental data for this article can be accessed online at https://doi.org/10.1080/00036846.2024.2364119
© 2024 Informa UK Limited, trading as Taylor & Francis Group
2 H. ZHENG ET AL.

paper examines the mechanisms by which ETS influ­ investment have garnered attention from the gov­
ences industrial investment. ETS promotes industrial ernment, and the academic community has con­
investment by improving environmental perfor­ ducted a series of discussions on these factors
mance and enhancing market value. This study’s (Coibion et al. 2020; Kliman and Williams 2015;
innovative examination of the impact and mechanism An et al. 2016). Uncertainty of economic policy
of ETS on industrial investment serves as a logical significantly inhibited the industrial investment of
basis for policy recommendations to promote the enterprises (Gulen and Ion 2016). And a national
green transformation of enterprises. Secondly, by ETS is considered to have a detrimental effect on
summarizing the contributions and gaps in previous GDP (Lin and Jia 2019).
literature, this paper integrates signalling theory, At the micro level, there is a positive correlation
financing constraint and capital structure theory to between the level of company financing constraints
and investment-cash flow sensitivity (Fazzari,
provide a robust theoretical framework for examining
Hubbard, and Petersen 1987; Gilchrist and
the impact of ETS on corporate industrial investment.
Himmelberg 1995; Schaller 1993; Whited 1992),
Based on this framework, the five proposed hypoth­
and ETS is likely to enhance enterprise financing
eses gain greater credibility. Besides, this study con­
(Zhang, Fang, and Wang 2018). Additionally, ETS
structs a more reliable environmental performance can yield substantial benefits for companies. These
index for China’s listed companies with data disclosed benefits included promoting environmental invest­
by regulatory authorities. This analysis extends exist­ ment, mitigating capital costs, enhancing the over­
ing literature theoretically, enriching the interpreta­ all leverage ratio, and improving return on
tion scope of signalling theory, financing constraint investment (Chen et al. 2021, 2022; P. Yu et al.
and capital structure theory, while also providing 2022).
a new theoretical foundation for effectively leveraging Market incentive-based environmental regula­
market mechanisms to achieve a win-win scenario tion tools could stimulate the transformation
between the economy and the environment. and upgrading of enterprises (Ren et al. 2018).
The remaining sections of this paper are orga­ As one of market incentive-based environmental
nized as follows. Section II provides an overview of regulation tools, ETS significantly improved the
the background and relevant academic literature green investment of enterprises (Mo et al. 2016),
on carbon ETS and industrial investment. Section and investing in low-carbon initiatives could
III establishes a theoretical framework to explain potentially enhance stock returns (Bernardini
the mechanisms through which the ETS impacts et al. 2021). However, some researchers found
industrial investment. Section IV introduces the that ETS internalized the cost of carbon emis­
research design, outlining the methodology and sion reduction, and increased the operating cost
data sources employed in the study. Section of companies, so it reduced investment expen­
V presents the results of the empirical analysis, diture (Zhang and Wang 2021). As a result,
and section VI conducts robustness test to verify though policymakers should consider both emis­
the validity and reliability of the empirical results. sion reduction targets and the potential effects
Section VII tests the five hypotheses proposed in on companies’ economic performance (Segura
section III using a mediation model. Section VIII et al. 2018), the effect of carbon trading policies
summarizes the research findings and proposes on the industrial investment of companies
policy recommendations. required further analysis. To fill this gap in the
literature, this study estimates the impact of ETS
on industrial investment and provides initial
II. Literature review
empirical evidence.
At the macro level, the overall real GDP growth Existing research on ETS primarily focuses on its
rate in China has been on a downward trend since impact on a range of micro-behaviours within
2010, reflected in the weak industrial investment firms, yet it often overlooks the effects on industrial
growth by non-financial enterprises (Shu, Zhang, investment, which plays a crucial role in economic
and Zheng 2020). The factors affecting industrial growth (Anderson 1990; Bakari 2017; Fazzari,
 APPLIED ECONOMICS 3

Hubbard, and Petersen 1987; Podrecca and with poor environmental performance may face
Carmeci 2001). However, a certain gap remains in regulatory consequences (Liu, Cifuentes-Faura,
understanding the specific effects of ETS on corpo­ et al. 2023). ETS also promotes transparency by
rate industrial investment levels, particularly in requiring listed companies to disclose their carbon
clarifying the underlying mechanisms. Therefore, emissions and environmental performance, further
this study offers a more nuanced understanding of reinforcing the government’s commitment to envir­
how ETS impacts industrial investment by provid­ onmental sustainability. What’s more, ETS helps
ing a theoretical framework and empirical reduce information asymmetry between companies
evidence. and investors by promoting transparency in envir­
In terms of empirical modelling, most of the onmental reporting. The increased transparency can
studies on China’s ETS largely ignored the varia­ improve investor confidence and reduce perceived
tions in the actual time of trading initiation and risks, leading to more stable and consistent indus­
instead selected a certain year as the policy imple­ trial investment (Angeletos and Pavan 2004;
mentation point (Hu et al. 2020; Zhang and Zhang Kahlenborn 1999). Therefore, the implementing of
2020). Alternatively, only the first batch of samples ETS can impact corporate behaviour, leading to
entered are retained as the treatment group, increased environmental performance and indus­
excluding subsequent pilot samples (Shen, Tang, trial investment.
and Zeng 2020; Yang, Li, and Liu 2021). Most Additionally, corporate disclosure of environ­
studies assess the Average Treatment Effect on mental performance serves as a signalling mechan­
the Treated (ATT) of China’s pilot ETS with the ism to capital markets and investors, aiming to
basic Two-Way Fixed Effects (TWFE) estimator. attract market attention and boost investor confi­
However, it’s impossible to use the basic TWFE dence. Since the late 1970s, literature on the value
estimator to determine the ATT unequivocally. relevance of corporate social responsibility has con­
To address this issue, this study applies the sistently concluded that corporate social responsibil­
ETWFE (Wooldridge 2021) to estimate the ATT ity information is valuable (Margolis and Walsh
of China’s pilot carbon ETS. 2001; Orlitzky, Schmidt, and Rynes 2003).
Furthermore, if social responsibility and environ­
mental information could predict a company’s
III. Theoretical framework and hypothesis future performance, it would relate to the company’s
development value (Botosan and Plumlee 2005; Clarkson et al.
2008). As companies comply with ETS require­
Signaling theory and corporate environmental
ments, they send a positive signal to the market,
performance
indicating their commitment to sustainability and
Signalling theory posits that individuals or organiza­ attracting more investment. Consequently, as envir­
tions in environments with incomplete information onmental performance improves among publicly
use certain actions or measures to send signals to listed companies in ETS pilot regions, they may
others, intending to influence their perceptions or experience an increase in market capitalization, dri­
behaviours (Liang, Li, and Sun 2023; Spence 1978). ven by enhanced investor confidence.
In this context, the carbon ETS pilot policy can be Based on the above theoretical analysis, we pro­
seen as a government action designed to send signals pose the following three research hypotheses. In the
to companies, investors, and the public regarding its research framework shown in Figure 1, we have
commitment to environmental regulation (Ma et al. considered the mechanism of signalling theory.
2023; Yao and Li 2018). By implementing ETS pilot
policies, the Chinese government signals its commit­
ment to carbon reduction and environmental sus­ H1: ETS improves industrial investment of listed
tainability. This signal encourages companies to companies.
adopt more environmentally friendly practices and
increase green investment (Huang et al. 2024; Wang H2: ETS improves environmental performance of
and Wang 2023), as it demonstrates that companies listed companies.
4 H. ZHENG ET AL.

Release signal Environmental Improve

Company performance

Receive signal Receive signal

Receive signal Industrial

ETS Investors investment

Release signal Improve

Market Improve
Government capitalization

Figure 1. Theoretical framework of signalling theory.

H3: The improved environmental performance 2011). This improved capital structure can foster
increases industrial investment. greater stability and enable companies to invest
more in industrial projects, knowing that they have
the financial flexibility to pursue long-term growth.
Therefore, a well-balanced capital structure caused
Financing constraint and capital structure theory
by ETS and increased market capitalization, with
Financing constraint theory revolves around the pre­ reduced debt costs and increased access to equity,
mise that companies face varying degrees of con­ can further promote the level of industrial invest­
straints when accessing capital markets (Fazzari, ment. Based on these, we propose the other two
Hubbard, and Petersen 1987). This theory posits research hypotheses.
that financing constraints can impact a company’s
investment decisions and the efficiency with which it
allocates capital (Islam and Hang Luo 2018; Yuan H4: ETS improves market capitalization of
et al. 2016). ETS pilot policy can influence financing companies.
constraints by signalling the government’s commit­
ment to environmental sustainability. Due to H5: The higher market capitalization improves
increased confidence in companies with better envir­ industrial investment.
onmental performance by capital markets and inves­
tors, the market value of these companies is elevated,
thereby reducing financing constraints (Chen et al.
Combined impact
2020). And this can lead to increased access to capital,
then improves the level of industrial investment ETS serves as a positive signal to the market, which
(Farooq et al. 2022; Farooq, Ahmed, and Shahbaz indicates a commitment to environmental sustain­
2022; Fung and Tsai 2015). ability. This signal reduces financing constraints and
Capital structure theory examines the mix of debt promotes a more balanced capital structure by
and equity a company uses to finance its operations. increasing market capitalization of companies. The
According to this theory, a company’s capital struc­ process fosters a business environment conducive to
ture is influenced by various factors, including finan­ industrial investment and environmental sustainabil­
cing constraints, risk perception, and market signals ity. As companies improve environmental perfor­
(Dang et al. 2017; Jiang, Xia, and Yang 2019; Yang, mance, they send positive signals to investors.
Chueh, and Lee 2014). Companies with higher mar­ Therefore, the risk associated with environmental
ket value are likely to face lower financing costs, regulation can be reduced. This improved transpar­
leading to a more favourable capital structure with ency can enhance investor confidence, leading to
reduced reliance on debt (Bolton, Chen, and Wang increased market capitalization and reducing
 APPLIED ECONOMICS 5

constraints on obtaining financing for industrial base. This study analyzes a sample of non-
investment. Companies with reduced financing con­ financial A-share listed companies on the
straints are more likely to invest in environmentally Shanghai and Shenzhen stock exchanges from
sustainable practices, as they have more flexibility in 2008 to 2020. Samples lacking control variables
capital allocation and can pursue long-term invest­ or with infeasible industrial investment calcula­
ment strategies. tions were excluded. Additionally, a tail reduc­
The signalling effect of ETS reduces financing tion was applied on the 0.5% and 99.5%
constraints because of improved market value. This percentiles. In this study, companies in pilot
can lead to a more balanced capital structure, with areas were used as treatment groups (referred
lower financing costs and reduced reliance on debt. to as Treati ), while those in non-pilot areas
As a result, companies with fewer financing con­ served as control groups.2 Table 1 provides an
straints and a balanced capital structure are more overview of the data collection process, includ­
likely to invest in environmentally sustainable prac­ ing its specific details.
tices. This leads to a virtuous cycle where companies
increase their industrial investment and improve
Outcome variable and control variable
their environmental performance. These improve­
ments can enhance a company’s market value and The variable ‘inv’ represents the standard measure­
attract more investors, further reinforcing the posi­ ment for new capital investment, which is assessed
tive impact of ETS on corporate behaviour. by the following indicator (Dai and Kong 2017;
Based on the above analysis and research Richardson 2006):
hypotheses, we considered the complete mechan­ The control variables in this paper include
ism framework shown in Figure 2. the logarithm of firm size (ASSET), net operat­
ing cash flow (CFA), return on total asset
(ROA), financial leverage (Lev), cash ratio
IV. Research design (Cash), board size (Board), fixed asset density
(PPE), the proportion of intangible assets (IA),
Sample and data
firm (Firm), and time (Year). Table 2 shows the
The author obtained the financial data from variable definition and references for control
China’s securities market and the CSMAR data­ variables.

Staggered DID

H2 Environmental H3
performance

H1 Industrial
ETS Signaling theory investment

H4 Market H5
capitalization Financing constraint
and capital structure theory

Intermediate effect model

Figure 2. Theoretical analysis framework of combined impact.

2
The variable Treati is a binary indicator, assigned a value of 1 if company i is included in the ETS, and 0 otherwise. Postt is a binary variable, taking a value of 1 if
the ETS has already been executed, or 0 if it has not yet been executed.
6 H. ZHENG ET AL.

Table 1. Sample selection process. governance, enhancing the ability to make investment
Obs. of decisions based on informed judgement.
portfolio
Step Procedure companies The descriptive statistics of the variables related
1 Non-financial A-share listed companies 32,097 to the sample are presented in Table 3.
from 2008 to 2020
2 Less: Obs. of special treatment companies 39
3 Obs. of the sample with leverage less 256
than 0 or greater than 1
4 Obs. of the sample where industrial 5,641 Model design
investment cannot be calculated and
control variables are missed The start dates for ETS in each pilot province are
Final sample 26,161
varied. Although Sichuan and Fujian are not pilot
provinces, they also initiated carbon ETS in 2016.
The multi-period DID estimator is equivalent to
The control variables directly affect the company’s a weighted TWFE estimator, but when the treatment
investment behaviour. Asset-based company size effect changes over time, it may generate some nega­
(ASSET) plays a crucial role in determining resource tive weights (Chaisemartin and D’Haultfœuille
availability and expansion tendencies. Organizations 2020; Goodman-Bacon 2021; Imai and Song Kim
with a higher debt ratio (Lev) can address resource 2021). This makes it impossible to use the basic
constraints and mitigate issues related to insufficient TWFE estimator to determine the ATT unequivo­
investment. Companies with strong profitability, as cally. Therefore, to allow for heterogeneity across
measured by return on assets (ROA), are more time and cohorts entry, while minimizing estimation
inclined to increase their investment level and expand bias, this paper applies the Extended Two-Way
their business scale. Maintaining a high level of cash Fixed Effects (ETWFE) (Wooldridge 2021) to esti­
reserves (Cash) helps to curb overinvestment and mate the ATT of China’s pilot carbon ETS.3
protect the potential investment prospects of the This paper employs the staggered DID research
fund. The existing magnitude of investment in fixed model to examine, consistent with the method of
assets, specifically property, plant, and equipment Wooldridge (2021) and Xiao, Yu, and Guo (2023).
(PPE), significantly influences forthcoming invest­ Define the time dummy for time t as
ment choices. Additionally, higher levels of operating ffst : t ¼ 2; . . . ; T g, where fst ¼ 1 if s ¼ t, otherwise
cash flow (CFA) provide more financial means for fst ¼ 0. If firm i is eventually subjected to the inter­
organizations to achieve investment goals, although vention, then the dummy variable
this may lead to overinvestment. A larger board size fdir : r ¼ q; . . . ; T g ¼ 1. The first intervention
(Board) indicates a higher level of corporate occurs at calendar time t ¼ q and subsequent
3
Furthermore, Callaway and Sant’Anna (2021) demonstrated a series of causal effect parameters, ATT (g; t), and aggregation schemes that are suitable for
highlighting heterogeneous treatment effects in a staggered DID setting. de Chaisemartin and D’Haultfœuille (2020) also provided a method known as ‘fuzzy
DID’ to evaluate the local average treatment effect. However, these methods either fail to yield an overall average treatment effect or are only applicable to
balanced panel data, making them unsuitable for the research in this paper.
 APPLIED ECONOMICS 7

Table 2. Variable definitions.

Use as Variable name Variable definition References for CV
Outcome inv Company’s industrial investment Richardson (2006); Dai and Kong (2017)
variable
Control variable ASSET The logarithm of firm size Chen et al. (2011); Cao et al. (2020)
CFA Net operating cash flow Kadapakkam, Kumar, and Riddick (1998)
ROA Return on total asset Fazzari et al. (1987); Yap et al. (2018)
Lev Financial leverage Aivazian, Ge, and Qiu (2005)
Cash Cash ratio Fazzari and Petersen (1993); Chen et al. (2018)
Board Board size Hermalin and Weisbach (2005)
PPE Fixed asset density Abel and Eberly (1996)
IA The proportion of intangible assets Hutton, Marcus, and Tehranian (2009)
Mediator variable EP Environmental performance
MC The logarithm of market capitalization

Table 3. Descriptive statistics.

Variable N Mean SD p5 p50 p95
inv 26,161 0.064 0.060 0.001 0.049 0.182
treat 26,161 0.365 0.481 0 0 1
Lev 26,161 0.430 0.211 0.101 0.424 0.785
ASSET 26,161 22.05 1.330 20.26 21.87 24.55
ROA 26,161 0.040 0.061 −0.045 0.039 0.127
Cash 26,161 1.093 2.122 0.096 0.441 4.221
PPE 26,161 0.222 0.168 0.013 0.187 0.556
CFA 26,161 0.045 0.074 −0.076 0.045 0.164
Board 26,161 5.599 1.554 3 6 8
IA 26,161 0.048 0.058 0.001 0.033 0.141

treatments continue every period after q until T.4 We r 2 fq; . . . ; T g can be calculated. And ATTs for
define yt ðrÞ as the first exposure in r, where r ¼ q; . . . ; T of entry cohort r can be estimated.
fr ¼ q; . . . ; T g. Then we define yt ð1Þ as the state Then we calculate the single coefficient which
of never being denotes an aggregated policy effect by the para­
� � treated. We use the dummy variables
dq ; . . . ; dT to indicate when the treatment enters meter of interest defined as follows (Wooldridge
the cohorts. Consequently, we can estimate the treat­ 2021; Xiao, Yu, and Guo 2023):
ment effect of the treatment group relative to the
untreated group: τrt ;E½yt ðrÞ yt ð1Þjdr ¼ 1�;
r ¼ q; . . . ; T; t ¼ r; . . . ; T: And the ETWFE estima­
tion model is as follows:

V. Results and discussion

Parallel trend test
The identification based on the DID method relies
In Equation (2), if firm i is first treated at t ¼ r, then on the parallel trends assumption, which posits that
dir ¼ 1, otherwise dir ¼ 0. Similarly, fst ¼ 1 if s ¼ t, in the absence of policy intervention, the industrial
otherwise fst ¼ 0. ωit ¼ di � pt , where di ¼ 1 if unit i investment levels for both the treatment and con­
was eventually subjected to the intervention. pt indicat­ trol groups would have followed the same trend
ing the post-treatment time periods: over time. The discrepancy in investment levels
pt ¼ 1ift ¼ q; . . . ; T and pt ¼ 0 between the treatment and control groups can be
if t ¼ 1; . . . ; q 1.5 ci represents firm-specific effects, influenced by many factors, but this difference
ft denotes year-specific effects, and uit is the error term. must remain constant over time.
τrs is the interest coefficient. The estimator for Wooldridge (2021) offered a simple framework
each ðr; sÞ combination with s 2 fr; . . . ; T g, for testing parallel trends. We add heterogeneous
4
It is assumed that there is at least one group that is never treated initially, and that the treatment is irreversible.
5
Note that we can write: pt ¼ fqt þ . . . þ fTt .
8 H. ZHENG ET AL.

linear trends diq � t; . . . ; diT � t to an ETWFE Table 4. The parallel trend test results.
regression and conduct a joint test (Xiao, Yu, and F-value P-value
inv (before PSM) 1.55 0.14
Guo 2023). The equation is as follows: inv (after PSM) 1.25 0.27

environmental sustainability, which can influence

the broader business environment. This signal
encourages businesses to adopt environmentally
friendly practices, even if they are not directly regu­
The null hypothesis is: lated by ETS.
Additionally, regulated companies may alter their
supply chains and business practices to comply with
This paper formulates the null hypothesis and tests ETS requirements (Ding, Liu, and Shao 2022; Liu,
it. The P-values and F-values are shown in Table 4. Cifuentes-Faura, et al. 2023). These changes can cas­
Both p-values are greater than 0.1. It indicates that cade through the supply chain, impacting suppliers
both groups pass the parallel trends test. and business partners not directly regulated by the
ETS. As a result, unregulated companies may also
adapt to align with these changes (Liu et al. 2024;
Baseline results Liu, Cifuentes-Faura, et al. 2023). Investor and con­
We obtain an estimator for each ðr; sÞ combination sumer expectations also play a role. As ETS promotes
with s 2 fr; . . . ; T g, r 2 fq; . . . ; T g by ETWFE. greater environmental transparency, investors and
And we aggregate τrs as suggested by Wooldridge consumers may prefer companies with better envir­
(2021) and Callaway and Sant’Anna (2021) to onmental practices. This broader expectation can
obtain the overall ATT �τ based on Equation (3). influence the business landscape in the pilot area,
As shown in Table 5, the overall ATT is signifi­ leading to increased environmental awareness
cantly positive. The estimated coefficient after among enterprises not on the controlled list.
aggregation in columns (1)–(2) is 0.0109 and
0.0080, which is significant at the 1% level.
Therefore, Hypotheses 1 is verified. Table 5. Estimation results for overall ATT by ETWFE.
(1) (2) (3) (4)
Moreover, we differentiated between companies inv inv inv inv
that fall under the ETS regulatory scope and those ETS 0.0109*** 0.0080*** 0.0114*** 0.0082***
that do not, based on the industry classification. (0.0021) (0.0021) (0.0023) (0.0023)
Lev −0.0144*** −0.0095
Columns (3)-(4) report the estimation results for (0.0056) (0.0064)
firms not in the regulated industries affected by ASSET 0.0123*** 0.0114***
(0.0014) (0.0016)
ETS, and these results are also significantly positive. ROA 0.0467*** 0.0492***
This study finds that the implementation of the ETS (0.0090) (0.0102)
Cash −0.0040*** −0.0036***
has increased industrial investment by companies in (0.0003) (0.0003)
the pilot regions, regardless of whether they are PPE −0.0621*** −0.0349***
(0.0081) (0.0097)
under the regulatory scope of the ETS. CFA 0.0161*** 0.0125**
These positive results are consistent with the find­ (0.0056) (0.0061)
Board 0.0002 0.0003
ings of existing environmental policy research (0.0004) (0.0004)
IA 0.1399*** 0.1558***
(Farooq, Ahmed, and Shahbaz 2022; Leiter, Parolini, (0.0194) (0.0218)
and Winner 2011). While the ETS primarily targets Firm effect Y Y Y Y
Year effect Y Y Y Y
specific industries, its implementation can create _cons 0.0807*** −0.1636*** 0.0737*** −0.1627***
indirect effects on other companies within the pilot (0.0016) (0.0287) (0.0018) (0.0322)
r2 0.0363 0.0823 0.0297 0.0704
area. These effects may arise from broader market F 12.0341 19.8489 8.5051 13.7222
signals and changes in business practices resulting N 26,161 26,161 20,264 20,264

from ETS compliance. ETS sends a clear signal The overall ATT coefficients from the ETWFE are reported in this table.
Standard errors in parentheses; *p < 0.1, **p < 0.05, ***p < 0.01. The
about the government’s commitment to following tables are the same.
 APPLIED ECONOMICS 9

VI. Robustness test Table 6. PSM-Staggered DID estimations results.

(1) (2)
PSM-DID estimation inv inv
ETS 0.0094*** 0.0071***
The impact of ETS on industrial investment is lar­ (0.0025) (0.0024)
Control Vars N Y
gely positive. However, it is crucial to acknowledge Firm effect Y Y
the potential influence of policy selectivity. For Year effect Y Y
_cons 0.0758*** −0.1747***
instance, selecting provinces with higher levels of (0.0016) (0.0299)
economic development as pilot areas may introduce r2 0.0354 0.0851
N 22,411 22,411
confounding factors that complicate the interpreta­
tion of results. Building on the methodologies of
previous studies (Chen et al. 2018; Dehejia and
Wahba 2002), this study identifies pilot companies After replacing the variable ‘inv’ in Equation (1),
as the treatment group and non-pilot companies as the results, shown in Table 7, are consistent with
the control group. And the sample is matched based the baseline results.
on the control variables mentioned previously.
This paper chooses the K-nearest neighbour (NN)
Exclusion of concurrent policy
matching estimator. Considering that the control
group is larger than the treatment group, we allow In September 2016, the National Development
for each treatment unit to be replaced and matched and Reform Commission launched a pilot pro­
with up to five control units. We set the caliper to 0.05 gramme titled ‘the system of paid use and trans­
and estimate the propensity score with logit regression action of energy consumption rights’, akin to
to reduce the risk of poor matching. Then, we use the ETS. This policy could also influence industrial
matched samples to recalculate the baseline equation. investment by companies, potentially leading to
The results are shown in Table 6. The coefficients for biased empirical results. Therefore, to mitigate
the interaction term of ETS are 0.0094 and 0.0071, potential disturbances caused by this policy, we
suggesting that ETS has a significant positive effect on excluded four pilot provinces (Henan, Zhejiang,
the industrial investments of pilot companies. Sichuan, and Fujian) from the sample data.
Table 8 presents the robustness test results, with
the ATT remaining significantly positive at
Variable substitution
0.0140 and 0.0108, respectively, thus affirming
According to Lu, Tang, and Zhang (2023) and the validity of the findings.
Farooq, Ahmed, and Khan (2021), we recalculated
the level of industrial investment (inv1) to replace
Placebo test
inv using Equation (6).6 This proxy has been widely
used in prior research to measure firm investment To assess whether the results are influenced by
(Gulen and Ion 2016; Li, Khurshid, and Wuhan unobservable factors rather than ETS, we con­
2015). ducted a placebo test by randomly assigning

6
Compared to inv, the calculation of inv1 excludes research and development expenses and the net cash received from the disposal of fixed assets, intangible
assets, and other long-term assets from the numerator.
10 H. ZHENG ET AL.

Table 7. The robustness test result of variable substitution.

(1) (2)
inv1 inv1
ETS 0.0084*** 0.0061***
(0.0021) (0.0021)
Control Vars N Y
Firm effect Y Y
Year effect Y Y
_cons 0.0824*** −0.1041***
(0.0015) (0.0284)
r2 0.0502 0.0935
F 14.3253 21.1099
N 26,161 26,161

Table 8. Robustness of excluding concurrent policy.

(1) (2)
inv inv
ETS 0.0140*** 0.0108***
Figure 3. Placebo test. The red hollow circle represents the
(0.0025) (0.0025)
Control Vars N Y P-value, and the black dashed line represents the kernel density
Firm effect Y Y distribution of the coefficients estimated by ETWFE.
Year effect Y Y
_cons 0.0801*** −0.1485***
(0.0018) (0.0320)
r2 0.0411 0.0857
methods, the stacked regression estimator offers less
F 10.3395 16.1391 flexibility in aggregating data and may yield inconsis­
N 20,867 20,867
tent results when estimating the sample-averaged
ATT (Baker, Larcker, and Wang 2022). Table 9
reports the results using stacked regression approach,
pilot observations, following the methodologies
which is consistent with the baseline results.
of Cai et al. (2016) and. Firstly, we randomly
selected companies from our sample to form
the treatment group and randomly determined VII. Mechanism analysis
the start year of the pilot. Secondly, we per­
formed staggered DID regression on this In Equations (7)–(9), MEDit serves as the mediating
hypothetical sample using Equations (2) and variable, representing environmental performance
(3). Thirdly, we repeated the first two steps 500 and market value. Zit is a set of control variables,
times. Finally, we obtained 500 estimated coeffi­ which are introduced in Section 4.2. Firmi and Yeari
cients and standard errors to calculate P-values. are vectors of firm-specific and year-specific dummy
Figure 3 illustrates the distribution of pseudo- variables that control for firm-level and year-level
coefficients and pseudo P-values from 500 fixed effects, respectively. uit is the error term.
regressions. The results demonstrate that the Following the methodology of Baron and Kenny
estimated coefficients are predominantly centred (1986), we examine the coefficient α1 (�τ in Equation
around zero, approximately follow a normal dis­ (3)), which has been established in the baseline ana­
tribution, and the P-values for most of the lysis (Table 6). We then proceed to evaluate α2 and γ2 .
sampled estimated coefficients exceed 0.1. These The mediating effect is considered significant if γ1 is
findings suggest that the estimated effects are significant, indicating a complete mediating effect.
unlikely to be attributable to unobservable
factors.

Stacked regression
An alternative method to mitigate issues associated
with the TWFE DID estimator is a ‘stacked regression’
approach (Baker, Larcker, and Wang 2022; Cengiz
et al. 2019; Wang et al. 2024). Compared to other
 APPLIED ECONOMICS 11

Table 9. Results of stacked regression approach. metric represents the monetary resources available
(1) (2) to a company in the open market, illustrating the
inv inv
ETS 0.007*** 0.006*** total financial resources the company can utilize
(0.002) (0.002) for its operational activities. The test results in
Control Vars N Y
Firm effect N N columns (1) and (2) reveal a significant mediating
Year effect N N effect of market capitalization on promoting indus­
Firm*group FE Y Y
Year*group FE Y Y trial investment in companies located in ETS pilot
_cons 0.063*** −0.213*** areas. Therefore, Hypotheses 4 and 5 are verified.
(0.000) (0.033)
N 57,308 57,308
R2 0.427 0.457

VIII. Conclusions and policy implications

Environmental performance Conclusions
We constructed the EP variable to measure corpo­ This paper, grounded in signalling theory, finan­
rate environmental performance, which comprises cing constraint theory, and capital structure theory,
four components: key pollution monitoring units, utilizes data from Chinese A-share listed compa­
sudden environmental accidents, environmental nies from 2008 to 2020 to construct a staggered
violations, and environmental petition cases.7 DID model to estimate the impact of ETS on
These variables are all dummy variables, and EP industrial investment. The analysis yields the fol­
is calculated as the sum of them. The larger the EP lowing conclusions:
value, the worse the environmental performance of
the company, and vice versa.
Unlike other sources of company environmental Table 10. Test on the environmental performance.
performance data, the information for the above (1) (2)
EP inv
variables is disclosed by government environmen­ ETS −0.0825*** 0.0077***
tal regulatory authorities, ensuring the reliability of (0.0133) (0.0021)
EP −0.0037***
the data, and preventing companies from manip­ (0.0013)
ulating environmental information to attract Control Vars Y Y
Firm effect Y Y
investors.8 In Table 10, the coefficients of the inter­ Year effect Y Y
action term between ETS and EP, as well as ETS _cons 0.2068 −0.1629***
(0.1404) (0.0287)
and inv in columns (1)-(2), are both positive and r2 0.2163 0.0826
significant. Additionally, the coefficient of EP to F 29.3559 19.6485
N 26,161 26,161
inv in column (2) is positive and significant, sug­
gesting a significant mediating effect.
Consequently, ETS policy can enhance industrial Table 11. Test on the market value of listed companies.
investment by improving the environmental per­ (1) (2)
MC inv
formance of listed companies. Therefore, ETS 0.0678*** 0.0075***
Hypotheses 2 and 3 are supported. (0.0153) (0.0021)
MC 0.0066***
(0.0016)
Control Vars Y Y
Firm effect Y Y
Market capitalization Year effect Y Y
_cons 6.7234*** −0.2077***
In Table 11, the explanatory variable MC is defined (0.2153) (0.0308)
r2 0.8387 0.0835
as the product of the total number of issued shares F 787.0222 20.2297
and the market value per share (Dias 2013). This N 26,161 26,161

7
The variable for key pollution monitoring units assigns a value of 1 if the company is identified as a key monitoring unit in reports, and 0 otherwise. An
environmental accident is recorded with a value of 1 if the company experiences a major environmental pollution incident, and 0 otherwise. Environmental
violations are noted with a value of 1 if the company has recorded violations, and 0 otherwise. Cases of environmental complaints receive a value of 1 if there
are complaints against the company, and 0 otherwise. And the data are sourced from the CSMAR database.
8
The author also uses the environmental performance data disclosed by the companies themselves, but the regression results are not significant.
12 H. ZHENG ET AL.

Firstly, the implementation of ETS has positively accurately assess the environmental impact of firms
influenced industrial investment in pilot regions. and make timely, informed investment decisions.
Before the policy’s introduction, there was no sig­ This strategy will not only enhance the sustainable
nificant systemic difference between the treatment development capabilities of firms but also improve
and control groups. The analysis, however, reveals the efficiency of resource allocation within the capi­
a positive impact of ETS on industrial investment tal market, achieving a dual win for environmental
following the policy’s implementation, confirmed protection and economic growth.
by a series of robustness tests. This conclusion
indicates that market mechanisms can simulta­
neously achieve emission reduction and promote Limitations and future research
the development of the real economy.
Secondly, the analysis of mechanisms suggests Our study has some limitations. This paper
that enhancements in environmental perfor­ examines the relationship between ETS and
mance and market value are the key drivers industrial investment at the micro level. Future
behind the positive impact of ETS on industrial research could benefit from comparing and ana­
investment. Companies with robust environmen­ lysing the impact of ETS at both the micro and
tal performance are more likely to expand indus­ macro levels. Currently, our study is grounded in
trial investment, reflecting optimism about their signalling theory, financing constraint theory, and
prospects. Furthermore, companies located in capital structure theory. Expanding this theoreti­
ETS pilot areas with good environmental perfor­ cal framework in future research could enhance
mance are prone to attract additional investors, our understanding of issues related to ETS.
thereby improving their market valuation and
opportunities to obtain capital, which in turn
helps to increase industrial investment. This con­ Highlights
clusion demonstrates that the implementation of ● ETS significantly and robustly promotes industrial invest­
ETS not only enhances the growth prospects of ment in China’s A-share listed companies from 2008 to
enterprises but also bolsters investor confidence. 2020.
Consequently, it underscores how market ● Stacked regression analysis shows that the positive impact
of ETS on industrial investment is robust.
mechanisms can guide investors to refine their
● A more reliable environmental performance index for
investment portfolios through the transmission China’s listed companies is constructed with data disclosed
of green signals, thus mitigating financing con­ by regulatory authorities in this study.
straints on environmentally-focused companies ● ETS promotes industrial investment by improving envir­
and ultimately optimizing resource allocation onmental performance and enhancing market value.
within firms. ● Signaling theory, financing constraint theory, and capital
structure theory are integrated to provide a comprehensive
theoretical framework for examining the impact of ETS on
Policy implications industrial investment.

These findings lead to several policy recommenda­

tions. Firstly, the government should continuously
Disclosure statement
emit green signals by annually tightening the total
carbon quota in the carbon emission trading market, No potential conflict of interest should be reported by the
guiding companies to persist in their green transfor­ author(s).
mation. Secondly, regulatory authorities should
establish a robust and unified system for disclosing
environmental performance, mandating that listed Funding
companies regularly disclose objective, comprehen­
We acknowledge support from National Social Science
sive, and accurate environmental performance Foundation of China [grand numbers 21AZD058]; National
information, and conduct rigorous regulatory veri­ Social Science Foundation of China [grand numbers
fication. Such transparency will enable investors to 23BZS161].
 APPLIED ECONOMICS 13

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