One stone, two birds? The impact of China's low-carbon city pilot policy on firms' investment efficiency

Purpose Reducing carbon emissions while sustaining economic growth is a central policy challenge for most countries. Capitalizing on the low-carbon city pilot (LCCP) policy in China, we investigate how environmental regulation affects the investment efficiency of carbon-intensive firms. Design/methodology/approach Exploiting the staggered LCCP rollout as a quasi-natural experiment, we use a triple-difference (DDD) design comparing polluting versus non-polluting firms around pilot designation. The sample covers Chinese A-share listed firms from 2009 to 2019 (24,463 firm-year observations). Investment efficiency is the absolute residual from Richardson (2006); we employ firm and high-dimensional fixed effects with robust errors, plus parallel-trend, placebo, and robustness checks. Findings The LCCP significantly improves investment efficiency of heavily polluting firms. The effect is stronger for firms with weaker external monitoring and higher agency costs, and works mainly by curbing under-investment. Parallel-trend and placebo tests support causality. Mechanism analysis points to strengthened monitoring, lower agency costs, and better corporate social responsibility performance. Originality/value This study links China's LCCP to corporate investment efficiency, reframing climate policy as a capital-allocation intervention. Our findings speak to the “double dividend” debate in environmental economics and are consistent with the Porter hypothesis, suggesting that well-designed climate regulation can deliver both environmental and capital-allocation benefits.