Environmental protection tax and trade credit: Evidence from China

Xueyao Lu, Lin Cheng and Yuhao Niu

International Review of Finance, 2025, vol. 25, issue 1

Abstract: This study investigates how the introduction of China's Environmental Protection Tax Law impacts firms' trade credit taking Chinese A‐share listed companies from 2013 to 2020 as the research sample. Since introducing the Environmental Protection Tax Law, the trade credit of pollution‐intensive firms has increased significantly. Following the mechanism test, the environmental fee‐to‐tax reform forces firms to improve their green innovation level and reduce their risk of environmental violations, which protects the suppliers' interests and increases the willingness of suppliers to provide trade credit for these firms. Further analysis shows that when the firm's market power is relatively higher, the regional judicial environment is better, the regional intensity of tax collection is higher and the effect of environmental fee‐to‐tax reform on the firm's trade credit is strong. Our results contribute to the literature regarding the impact of environmental regulations on firms from the perspective of trade credit, and we provide a new perspective and empirical evidence to support Porter's win‐win hypothesis further.

Date: 2025
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