Revisiting Pecking Order Theory in a Green Era: Financial Development, Climate Uncertainty, and Environmental Investment

Bilal Haider Subhani, Asif Ali and Farman Ali

Manchester School, 2026, vol. 94, issue 2, 145-167

Abstract: Financial development has the capacity to assimilate economic, environmental, and political shocks to the maximum extent. Building on this strength, the present study investigates how Financial Sector Development (FSD) influences Environmental Protection Investment (EPIRR), while also accounting for the moderating role of Climate Policy Uncertainty (CPUI), using firm‐level data from Chinese A‐share listed companies spanning 2010 to 2022. To ensure robust and reliable findings, the study employs multiple methodological approaches. The findings show a strong positive relationship between FSD and EPIRR. It indicates that a stable and developed financial system improves credit access, lowers funding costs, and increases firms' ability to invest in environmental projects. It also encourages green products like sustainability‐linked loans and improves long‐term planning through stronger investor confidence. However, when CPUI is included as a moderating factor, the positive relationship weakens, which unveils that an uncertainty about future environmental rules makes firms and financial institutions cautious. As a result, they often delay or reduce their green investments due to unpredictable regulations, unclear enforcement, and uncertain returns on long‐term sustainability efforts. This study adds to theory by using the Resource‐Based View and Strategic Choice Theory to explain how FSD serves as a strategic resource and decision‐making driver for corporate green investment. Empirically, it advances the sustainability finance literature by employing rigorous econometric techniques and robustness checks, while also incorporating alternative measures of FSD, as well as heterogeneity analysis, channel exploration, and the entropy balancing approach. Practically, it underscores the role of a well‐developed financial sector in reducing financing barriers for green projects while highlighting the need for stable climate policies to foster long‐term sustainability investments. This study reconceptualized the traditional Pecking Order Theory by demonstrating that in a well‐developed financial system, firms prefer external funds over internal ones due to lower costs and reduced information gaps.

Date: 2026
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