The Leveraging Game: Corporate Response to Green Credit Policy

ABSTRACT This study examines how heavily polluting firms strategically respond to green credit constraints, focusing on leverage manipulation as a key financial adjustment. Using a difference‐in‐differences (DiD) framework and a sample of Chinese listed manufacturing firms from 2007 to 2020, we find that green credit policies significantly increase leverage manipulation, particularly among firms with weaker external governance, tighter financing constraints, and lower growth potential. Although leverage manipulation temporarily enhances financial flexibility, it does not improve firms' underlying financial health and ultimately raises their default risk over time. These findings reveal the unintended financial consequences of green credit policies and underscore the need for stronger regulatory oversight to curb excessive leverage manipulation and safeguard financial stability.