Environmental Regulation and Corporate Trade Credit Financing: Evidence From the Cleaner Production Standards in China

ABSTRACT This paper investigates the impact of environmental regulation on corporate trade credit financing using the exogenous passage of industry‐level cleaner production standards in China. The results of a staggered difference‐in‐differences model show that firms in regulated industries receive more trade credit. Further channel analysis shows that environmental regulation increases firms' usage of trade credit by increasing financial pressure and requirements for suppliers' product quality assurance. The effect is more pronounced for firms with greater initial bargaining power and stricter supervision. Moreover, we find that the increased trade credit associated with environmental regulation increases corporate green innovation, operating performance, and mitigates financial distress. Finally, we find that there is downstream propagation of product quality assurance, particularly for firms that rely heavily on downstream partners.