Financial constraints and the payoff to going green: Evidence from environmental disclosure and investment

This study investigates the impact of disclosure formats and green expenditures on firm-level environmental performance for Chinese A-share manufacturing firms from 2008 to 2023, accounting for financial and institutional frictions. Drawing on firm and year fixed effects and instrumental-variable estimations, the analysis distinguishes between CSR reports, environmental disclosures in annual reports, and standalone environmental reports, as well as two categories of green spending: capital investments and operational input costs. The results reveal that CSR reports and environmental information embedded in annual reports, particularly under more stringent constraints, are positively associated with environmental performance, whereas standalone reports are comparatively less effective and context-dependent. Investments in environmental protection generally improve performance, but their marginal returns decrease when firms face financing constraints or operate in weaker institutional environments. The effectiveness of operational input spending similarly depends on external frictions, with stronger outcomes observed under high borrowing costs or macroeconomic volatility, and diminished impact in regions marked by heavy taxation, corruption, or limited competition. These findings highlight that the credibility of environmental disclosure and the returns to green investment depend critically on external financial and governance conditions. Policy actions should thus pair disclosure reforms with enhanced green financing and institutional improvements to ensure transparency and investment jointly drive measurable environmental gains.