Liquidity Shocks, Capital Allocation, and Corporate Environmental Rating: Evidence from Tax Refunds

This paper investigates China’s 2018 VAT Credit Refund Policy (VATCRP) and its unexpected environmental impacts. By employing a difference-in-differences strategy and analyzing panel data from Chinese publicly listed companies between 2009 and 2021, our findings indicate that this policy significantly improved firms’ environmental performance ratings. Our mechanism analysis reveals this improvement was driven by a multi-faceted corporate capital allocation. While firms used a portion of the funds to enhance environmental information disclosure, they also significantly increased real green capital expenditure, which led to tangible reductions in actual pollutant emissions, particularly for water pollutants. Moreover, while the policy also financed a scale expansion, this growth was achieved with improved environmental efficiency. We also find that the policy stimulated more effective green innovation and accelerated the adoption of advanced operational technologies. These effects are more pronounced for firms under stricter local environmental regulation and in high-pollution industries. The results suggest that broad, liquidity-enhancing tax policies can serve as a complementary tool to incentivize corporate environmental upgrading.