Green lending and corporate leverage manipulation: evidence from China's green credit guidelines

Purpose This study aims to investigate how the transition from unidimensional (financial) to multidimensional (financial and environmental) bank screening – induced by China's 2012 Green Credit Guidelines (GCG) – affects corporate leverage manipulation. Specifically, we examine whether integrating environmental criteria into credit decisions exacerbates leverage manipulation due to heightened financing constraints or generates a disciplinary governance spillover that curbs such opportunism. Design/methodology/approach Exploiting the promulgation of the GCG as a quasi-natural experiment, we employ a difference-in-differences (DID) design on a comprehensive sample of Chinese listed firms from 2007 to 2016. To ensure robust causal identification, our empirical strategy isolates the credit supply channel via triple-difference (DDD) estimations and explicitly controls for concurrent macro-environmental policies and high-dimensional fixed effects. Findings We document that the GCG significantly inhibits leverage manipulation among high-polluting firms, yielding a deleveraging effect that is economically comparable to major national macroeconomic shocks. Mechanistically, the policy operates by redirecting banks' attention toward environmental performance and intensifying their financial scrutiny of borrowers. Cross-sectional tests reveal that this external disciplinary effect is stronger in regions with heightened environmental awareness and less competitive banking sectors and acts as a crucial compensatory governance substitute for firms with lower information transparency and weaker corporate governance. Furthermore, curbing this manipulation facilitates substantive green innovation and optimal capital structure adjustments. Originality/value This study bridges the environmental finance and accounting manipulation literatures by uncovering a novel “governance spillover” of green credit policies. We demonstrate that multidimensional screening standards extend beyond capital reallocation to fundamentally discipline corporate financial integrity, highlighting the profound implications of sustainable finance regulations for the corporate information environment.