The Supply Chain Ripple Effect of Customer Environmental Regulatory Pressure: A Perspective on Suppliers' Financial Asset Allocation

ABSTRACT Using data from Chinese A‐share listed firms and their top five customers over the period 2010–2023, this study finds that supplier firms allocate more financial assets when their customers face higher environmental regulatory pressure and that this effect is primarily driven by a precautionary savings motive. This finding remains robust across a series of endogeneity and robustness tests. Mechanism analyses reveal that Customer Environmental Regulatory Pressure (CERP) affects suppliers' financial asset allocation through two channels: financing constraints and green transition pressure. In addition, the moderating effects indicate that stronger ESG performance and higher government subsidies weaken the positive impact of CERP on suppliers' financial asset allocation. Heterogeneity analyses reveal that the effect is more pronounced among suppliers with weaker external financing capacity, higher technological innovation intensity, greater customer concentration and those operating in heavily polluting industries or in regions with more developed financial markets. Finally, the results suggest that CERP does not lead to excessive or over‐investment in financial assets, but rather reflects a precautionary adjustment in response to increased uncertainty. Overall, the study provides theoretical insights for market participants to better understand the drivers of financial asset allocation in real‐sector firms and offers empirical evidence and practical guidance for policymakers in formulating relevant policies.