The Power of Policy: Market-oriented Environmental Regulation and Green Transformation of Firms

Abstract With the goal of achieving carbon neutrality, the green transformation of manufacturing firms has become a major trend, and exploring its influencing factors is of great practical significance. This study examines whether the carbon emissions trading policy can promote firms’ green transformation by analyzing its characteristics through both institutional pressures and incentives. Using a fixed-effects panel data model and data from Chinese A -share listed manufacturing firms during 2010 and 2020, the basic empirical results confirm their positive relationship. We further examine the moderating roles of both external institutional environments and internal resources. The results suggest that, as external moderators, regions with high public environmental attention and government subsidies can amplify the positive impact. Internally, for firms with executives who have environmental experience, the carbon emissions trading policy has a greater impact on their green transformation, while higher resource slack plays the opposite role. Additional analyses suggest that, in the short term, this policy may hinder the green transformation of firms in adjacent regions and potentially lead to economic losses for the pilot firms.