Poor development in financial markets may hinder firms from achieving environmental regulation goals set by governments. By using a policy change of environmental regulation in China and exploiting cross-city variation in banking concentration, we study how competition in the local banking market affects the effectiveness of environmental regulation.
Results indicate that banking industry competition played a positive role in assisting firms’ reduction in SO2 emission to meet environmental regulation targets. Firms located in cities where banking competition is fierce tend to invest more in desulphurizing capacities when faced with a tightening of regulation. Both long-term debt and current liability increased for firms in cities with tougher banking competition, suggesting these processes may be facilitated by bank financing. These results are indicative that a well-functioning banking sector plays a critical role in environmental regulation to be effective.
Zoom ID: 937 5732 8892