Why do firms go green?

Abstract

In this study, I analyze the reasons that firms go green. I develop a novel green commitment score to measure firms' green levels. The score is based on textual analysis of standardized green commitment information from Chinese-listed firms' annual reports. By exploring the control right transfer of air quality monitoring stations from local governments to the central government, I find that high government policy enforcement intensity and firms' low production shift abilities will increase firms' green commitment score. With the two-stage-least-square methodology, I further prove that firms with low green commitment scores and high production shift abilities will shift production after the increase of high government policy enforcement intensity. I also explore the benefits of going green early. I find that firms with high green commitment scores have the flexibility to replace their existing debts with low-cost debts and thus decrease financial expenses.