Market-Based Environmental Regulation and Corporate Financial Performance: An Extension Study of China's Emissions Trading Scheme Pilots

Abstract

This study re-examines the effect of China's emissions trading scheme (ETS) pilots on corporate financial performance and is positioned as an extension of the recent quasi-experimental evidence on this question. Using an extended panel of Chinese A-share listed firms from 2010 to 2024 and a difference-in-differences (DID) design, the study identifies a significant positive effect of the ETS pilots on return on assets (ROA). The result remains significant when Tobin's Q replaces ROA, when industry fixed effects are added, and when the COVID-19 years are excluded. Compared to previous research, this study makes three contributions: first, it broadens the study window to a full post-policy decade; second, it investigates the financing-constraint channel; and third, it maps where the policy effect stops operating—the boundary conditions. The positive effect is driven by private and high-innovation firms; it is insignificant for state-owned and foreign firms and turns significantly negative for low-innovation firms. Mechanism analysis indicates that the ETS alleviates financing constraints, thereby supporting firms' investment capacity, operating efficiency, and profitability. The findings suggest that market-based environmental regulation can generate both environmental and economic benefits, provided that complementary financing and innovation support reach firms facing stronger adjustment constraints.