Formal Institutional Pressure and the Integration of Corporate Environmental and Financial Performance: Empirical Evidence from Listed Companies in Heavily Polluting Industries in China

Abstract

China’s “carbon peak and neutrality” policy has thrust the convergence of corporate ecological conservation and economic progress to the forefront of sustainable development. This study, aiming to tackle the “sustainability challenge”, delves into the driving forces and operative mechanisms that intertwine corporate environmental performance with financial outcomes from 2015 to 2020. Focusing on A-share listed companies in heavily polluting sectors across Shanghai and Shenzhen stock exchanges, it categorizes formal institutional pressure into two types: command-oriented and market-driven, revealing a significantly stronger positive effect of market-based pressure compared to command-based pressure. Additionally, this research examines the distinct impacts of these institutional pressures under different conditions such as ownership structure, regional location, and executive education levels. The findings indicate that state-owned enterprises, eastern region firms, and those led by highly educated executives are more responsive to command-based pressure. Conversely, privately-owned businesses, entities in central–western regions, and those with lower executive education primarily respond to market-based pressure. Moreover, this study underscores the interplay between informal and formal institutions, observing that the influence of market-based pressure on corporate environmental–financial integration is notably amplified when public awareness of environmental protection increases, thereby highlighting social factors’ pivotal role in business decision-making. In essence, this paper accentuates the significance of aligning corporate environmental and financial goals for sustainable development, offering fresh insights to academia and fostering sustainable practices and research within the corporate realm.

1. Introduction

With the development of ecological civilization construction and the proposal of the “carbon peak and carbon neutrality” strategy, China has raised ecological environmental protection to a new height. As the direct creator of social finance, but also the main producer of environmental pollution, the environmental performance of enterprises has become the focus of attention; enterprises not only have to face increasingly stringent environmental regulations and policy requirements but also maintain stable financial performance in market competition. However, there is a complex interaction and symbiotic relationship between environmental performance and financial performance, and the integration of environmental and financial performance is presently the dynamic game between corporate environmental performance and financial performance [1,2]. Like other corporate behaviors, the environmental and financial integration of enterprises will also be affected by external factors, especially in the context of China’s continually maturing environmental protection legal regime; the significance of formal institutional mechanisms is undeniable, and their influence on corporate behavior through local government pressures is expected to manifest in a more pronounced manner. Companies must recognize the dual impact of formal regimes on their environmental and financial performance in order to strike a balance between the two.

In the formal system, laws and relevant government rules and regulations are formulated by society or administrative agencies, which are bound to the public power of the society, have a stronger binding force, and have a more direct impact on the constrained party; therefore, the impact of the revision of laws and regulations and policy changes on the business activities of enterprises is the focus of scholars’ attention. Referring to the discussion of formal institutions at home and abroad [3,4], this paper divides formal institutions into command-based pressure and market-based pressure according to their different forces. Among them, command-based pressure, which is a typical representative of the formal system, relies on administrative measures and government regulation of environmental pollution [5]. As an actual demonstration of its commitment, China’s regulatory framework imposes strict emissions requirements on almost every industrial segment, backed by a spectrum of penalties that may include operational disruptions—whether in the form of temporary stoppages or outright closures—as well as directives for companies to adopt precision-designed energy efficiency improvements and emissions reduction measures designed to mitigate ecological harm. Market-based pressure, which relies on market-oriented government economic means, is typically represented by the issuance of environmental protection subsidies, the collection of sewage charges, the establishment of environmental protection taxes, and the implementation of emission trading, leaving the search for the best way to resolve these situations to the enterprises themselves. The use of market-based pressure tactics constitutes a widely embraced method within governmental arsenals to govern and mitigate pollutant emissions through economic incentives embedded in market-centric rules. Although the government also controls pollution emission standards and sets penalties for non-compliance, unlike command-based pressure, market-based pressure is based on economic institutions and market mechanisms [6] and is usually more appropriately designed to enable enterprises to reduce their negative environmental impact through economic incentives, thereby improving the integration of environmental performance and financial performance.

Under certain circumstances, the above two pressures provide a good starting point for enterprise environmental protection and resource allocation. However, institutional theory suggests that different types of formal institutions have different impacts on firm behavior [7,8], for example, in terms of improving total factor productivity [9], enhancing firm innovation [10], inhibiting the resurgence effect of pollution [11], and improving regional economic efficiency [12]. The extant literature has extensively probed into the differential impact of formal institutions [13]; for example, there are certain discussions on whether and how formal institutions affect the environmental performance or financial performance of enterprises, but the extent to which official regulatory structures influence the harmonization of environmental and financial performance metrics within organizations is an area where knowledge is notably sparse. The above research gaps provide a research space for this paper.

Therefore, this paper’s research objective centers on examining the profound ways in which distinct forms of formal institutions influence firms’ environmental–financial integration. It further delves into how command-based and market-based pressures uniquely affect such integration for enterprises with varying ownership structures, geographical locations, and executive cultural levels, offering tailored recommendations to both businesses and governments. Additionally, this study incorporates informal system factors, particularly focusing on public environmental awareness and its impact on corporate eco-financial alignment. With growing societal attention to environmental conservation, shifts in public perception can potentially shape business environments and market competitiveness to some extent, thereby illustrating the dynamic interplay between informal and formal systems. This paper aims to advise business leaders, policymakers, or scholars on strategies to enhance environmental–financial integration within corporations, thereby better preparing them to address the impacts of various types of pressure on their sustainability.

The theoretical contributions of this paper can be summarized as follows: Firstly, this research contributes to the field by examining the factors affecting the synergy between corporate environmental performance and financial outcomes from the vantage point of formal institutional pressure. It enriches environmental management and firm performance theories by differentiating formal institutional pressure into command-oriented and market-driven categories, elucidating their distinct impacts on firms’ eco-financial integration. This provides a novel lens for constructing theoretical frameworks around institutional influences on firm performance. Secondly, through an analysis of variations among enterprises with differing ownership structures, regional locations, and executive education backgrounds, this study discerns the disparities in how command-based and market-based pressures influence corporate environmental and financial integration. This insight assists business executives in comprehending the nuanced effects of institutional pressures on various types of enterprises, thereby guiding more effective strategies for environmental and financial management. Lastly, this investigation discovers that heightened public awareness of environmental protection amplifies the role of market-based pressure in driving corporate environmental and financial convergence. This underscores the critical importance of social factors in shaping corporate environmental conduct, emphasizing the need for businesses to seriously consider public opinion and concerns. It prompts companies to proactively engage in societal responsibilities, particularly those pertaining to environmental protection initiatives.

The subsequent structure of this paper is as follows: The second segment contains a literature review and hypotheses, which will sort out and analyze the previous literature and theories and propose the research hypothesis of this paper on this basis. The third part contains the methodology and sample description, which verifies the hypotheses of the second part. The fourth part presents robustness checks, examining the robustness of the model from two perspectives: regional differences and sample selection. The last part is the conclusion, which mainly includes research summary, suggestions, research innovation and future research direction.

2. Literature Review and Hypotheses

2.1. Heterogeneous Formal Institutional Pressure and Corporate Environment Financial Integration

An increasing number of scholars are devoting their attention to the interplay between the environmental and financial performance of businesses. The harmonious interaction and balanced development between these two aspects have been identified as pivotal for ensuring sustainable growth amidst economic transitions [14]. Studies have revealed a non-linear, inverse U-shaped correlation between environmental management practices and financial outcomes [15], signifying that enterprises must attain an optimal level of environmental stewardship in order to maximize overall performance. This relationship illustrates that when environmental management standards are inadequate, firms may struggle to effectively address ecological challenges, which can consequently erode financial performance. Conversely, at elevated levels of environmental management, companies might encounter heightened cost pressures, also impacting their financial metrics negatively. Consequently, it is crucial for organizations to strike a delicate equilibrium between pursuing environmental sustainability and maintaining financial viability in pursuit of peak performance. China’s central environmental inspection, as the most stringent environmental testing and law enforcement measures of the Ministry of Environmental Protection in recent years [16], has effectively brought higher violation costs and market losses to polluting enterprises and enterprises with excess production capacity. Based on institutional theory, it can be found that government law enforcement in formal institutions has a significant impact on promoting cooperation performance [17]. Jose and Reynaud [18] posit that the regulatory pressure emanating from a formal system, quantified by means of monitoring emissions and enforcing compliance with standards, can be a significant catalyst for enhanced environmental outcomes. In another study, Zhao et al. [19] demonstrate that environmental regulations tied to energy efficiency exert a U-shaped non-linear influence on green economic growth, wherein spatial spillover effects and spatial feedback mechanisms play pivotal roles in shaping this relationship. Moreover, scholarly research has also uncovered that distinct types of incentive schemes can yield varying degrees of cooperative behavior and performance outcomes among entities. For example, economic incentives such as monetary penalties can effectively improve green behaviors, but even if the same level of economic incentives are provided, mandatory command incentives will not affect the improvement of green behaviors [20].

Businesses, as a reaction to prescriptive pressures, must proactively implement actions aimed at preserving the environment to qualify for and maintain their “operating licenses”. This process of aligning with government supervision and management not only legitimizes their operations but also constitutes the core foundation and existential threshold upon which corporate survival and development hinge. However, loose command-based pressure does not necessarily effectively influence corporate behavior [6]. Companies may only meet the minimum standards of command-based pressure and not invest additional resources in environmental protection, i.e., they are only concerned with whether they are wearing the cloak of environmental compliance, but not on whether the cloak is pleasing to the eye. When the cost of environmental compliance is much higher than environmental penalties, some businesses with weaker financial resources may choose to pay environmental penalties directly. The peculiarity of China’s governance structure lies in its centralized fashion of developing environmental policies, typically undertaken by the central authority. Despite this, local administrations wield substantial flexibility [21] during the enactment process, a factor accentuated by the uneven economic progress across China’s diverse territories, thus contributing to potentially divergent efficacies and enforcement benchmarks for environmental rules. When the local economy is behind, local governments may prefer the latter in the game between environmental protection and local economic development. The inability to rigidly enforce environmental policies can weaken the compulsion for businesses to adhere to environmentally protective behaviors, consequently dampening the effect of authoritative directives. This could lead corporations to continue prioritizing economic growth strategies at the expense of environmental preservation, ultimately not enhancing the synergy between their environmental sustainability and financial results. At this time, the effectiveness of market-based pressure is even more pronounced, precisely because command-based pressure is limited.

Although based on China’s national conditions, command-based pressure still exceeds market-based pressure [4], command-based pressure also encourages enterprises to adopt environmental protection practices to obtain legitimacy, such as inducing enterprises to use appropriate clean technologies to solve environmental problems [6], but this approach is too centralized and inflexible. It may lead to many unnecessary costs [22]. The impact of China’s environmental penalties on corporate decision-making concerning energy-saving measures and emissions cuts appears marginal; instead, these penalties primarily serve to diminish the volume of pollutants discharged by companies. This may occur because enterprises tend to default to paying fines if the cost of full regulatory compliance substantially exceeds the fine costs associated with non-compliance [23]. Many economists prefer market-based environmental policies [22]. Market-based pressure creates economic stimuli that stimulate businesses to adopt green behaviors, reducing the economic burden of engaging in green practices, innovation, and other sustainability-focused activities. Consequently, this raises the intrinsic motivation for environmentally responsible actions among enterprises, eventually promoting a simultaneous advancement in both environmental and financial achievements. This rationale underpins the hypothesis proposed in this research.

H1. 

Compared with command-based pressure, market-based pressure has a significant positive impact on the environmental and financial integration of enterprises.

2.2. Impact of Heterogeneity of Property Rights

Inconsistencies in how different enterprise types respond to the same environmental policy exist due to the inherent heterogeneity in their property rights systems [24]. Relevant studies further confirm that the effectiveness of formal institutional pressure is related to the ownership of firms [25]. At a certain level, the diversity within the essence of property rights in businesses directly reflects the differential patterns in resource acquisition and decision-making mechanisms across various entities. Generally speaking, SOEs are closely tied to various levels of government, and their management tends to make decisions that adhere to formal command-oriented pressures in order to innovate and meet environmental performance standards [26]. Unlike state-owned enterprises, which are inherently politically connected, the environmental behavior of private enterprises in line with the pressures of the market-based formal system is often seen as a signal to the government in order to project a green image. As a result, companies under different ownership systems respond differently to environmental protection. This study contends that SOEs operate under specific political circumstances that inherently incline their decision-making processes towards political considerations [27], compelling them to accept increased societal and environmental duties assigned by the government. Meanwhile, privately owned firms, constrained by profit maximization aims [28] and resource constraints [29], tend to prioritize economic policies like state subsidies, waste treatment fees, and ecological taxes during their strategic choices, with the aim of garnering enhanced financial resources. Hence, the subsequent hypothesis is presented accordingly.

H2. 

Compared with private enterprises, state-owned enterprises exhibit stronger command-based pressure in their environmental–financial integration, while experiencing weaker market-based pressure.

2.3. Effect of Regional Heterogeneity

China’s vast land and fiscal decentralization system have led to spatial heterogeneity in environmental regulation [30]. The differences in economic conditions, fiscal revenues, and resource endowments among provinces and cities in China provide the possibility for environmental regulation to adapt to local conditions [31]. In areas with relatively backward economic development, if enterprises want to achieve further development, their financial strategies and environmental strategies will become important means to win the support and policy resources of local governments, and they are also important tools to establish “relationships” between enterprises and local governments. Enterprises send a positive signal to local governments through environmental strategies or financial strategies and use environmental strategies and financial strategies as important tools to establish good relations with local governments, hoping to obtain more policy preferences and government subsidies. Within the context of China’s increasingly rigid environmental rules and the booming importance of green economic progress, enterprises in regions with high environmental penalty regulations may consciously or inadvertently diminish the likelihood of environmental non-compliance by deepening the convergence of their environmental and financial management practices. This strategic adaptation helps them evade significant penalties and protect their reputational standing. By aligning with the fast-rising need for harmonizing environmental and financial aspects, businesses can leverage this alignment to advertise their eco-friendly stance, thereby strengthening customer allegiance and expanding their market footprint. In the more developed eastern regions, characterized by comprehensive regulatory enforcement and robust economies, the marginal effect of market pressure might diminish, making them more receptive to policy incentives. However, in the less economically advanced central and western parts of the country, companies are keener on responding to market-based pressures as they seek economic backing, such as state-provided environmental subsidies. Based on this, the following hypothesis is proposed.

H3. 

Compared with the central and western regions, enterprises in the eastern region experience stronger command-based pressure in their environmental–financial integration, coupled with weaker market-based pressure.

2.4. Impact of Executive Heterogeneity

Although the constraints and incentives from the formal system are the same when officials in the same region make behavioral decisions, based on the Upper Echelons Theory, executives’ environmental background [32], executives’ mindset [33], and executives’ values [34] will also have an impact on corporate environmental behavior decisions. Executive differentiation is a key factor that explains the differences in the way companies respond to the same environment [32]. To a certain extent, senior executives’ cultural level determines the height of executives’ values and cognitive paradigms, and then, executives’ identification and interpretation of external formal institutional pressures produce differences, which are then further projected into the behavioral decisions of enterprises. Our research argues that the extent to which formal regulatory pressure impacts a firm’s synthesis of environmental and financial considerations differs according to the educational qualifications of its management. This difference manifests via executives with higher educational degrees typically exhibiting a greater understanding of environmental externalities. Compared with market-based measures such as direct government subsidies, highly educated executives are more likely to perceive the potential opportunities contained in the pressures of the imperative formal system and then incorporate the balanced development of the environment and finance into the strategic goals of the enterprise, and they are willing and able to invest the limited resources of the enterprise in environmental protection without destroying the economic foundation of the enterprise. When executives with relatively weak education levels are subject to economic measures such as government environmental protection subsidies, they also make up for the ability limitations caused by their own cultural shortage and directly improve the degree of environmental and financial integration of enterprises through the government’s economic means. Based on this, the following hypothesis is proposed.

H4. 

Higher levels of executives’ cultural literacy are associated with increased command-based pressure and decreased market-based pressure on corporate environmental and financial integration.

2.5. Effects of Informal Institutional Pressures

In terms of environmental protection, in addition to the increasing formal institutional pressures faced by enterprises (such as the gradual implementation of government environmental regulatory policies), the informal institutional pressures faced by enterprises are also highlighted, such as the awakening of public awareness of environmental protection [35]. Based on stakeholder theory, the public has a certain influence on the behavior of enterprises. When market-based pressures significantly affect corporate environmental and financial integration, public awareness of environmental protection will also have further impact. On the one hand, a heightened public consciousness of environmental protection translates into increased recognition by enterprises of the environmental risk pressures imposed by stakeholders. This prompts firms to implement corresponding environmental safeguards in order to align with societal expectations for eco-protection, thereby bolstering their drive to enhance environmental performance. As a result, this dynamic fosters a positive correlation between market-driven pressure and the integration of corporate environmental and financial strategies. On the other hand, based on institutional theory, this paper argues that if enterprises adopt the rational requirements recognized by society, they will enhance their legitimacy to cope with market-based pressures and then promote the positive effect of market-based pressures on the environmental and financial integration of enterprises. Based on this, the following hypothesis is proposed.

H5. 

Public awareness of environmental protection has a significant positive correlation between market-based pressure and corporate environmental and financial integration.

3. Methodology and Sample Description

3.1. Sample and Data Collection

This study selects A-share listed corporations operating in heavily polluting sectors on the Shanghai and Shenzhen stock exchanges within the timeframe from 2015 to 2020 as its research subjects. Following an initial determination of the analysis sample, to better align with the research requirements, we further refine the data through the following sequential steps: (1) exclude the companies listed in the current year and those that are subject to special treatment (ST, ST*), (2) exclude the companies that have undergone major restructuring or changes in their main business during the study period, and (3) exclude the companies with missing main analysis variables. In this paper, all the contiguous reading variables were winsorized at the 1% and 99% quantiles on an annual basis to eliminate the influence of extreme values. Specific data such as environmental performance are collected manually, and the rest of the required data are mainly from CSMAR Database, RESSET Database, and China’s Environmental Yearbook.

3.2. Study Design

To examine the effects of formal institutions on corporate environmental–financial integration, this study constructs models (1) and (2) to individually assess the influence of command-based pressure and market-based pressure on such integration. Furthermore, given that these two pressures often coexist in a firm’s context, we establish model (3) to investigate how the combined effect of both command- and market-based pressures affects firms’ environmental–financial alignment [36]. Simultaneously, model (4) is formulated to validate the potential moderating role played by informal institutions.

$${EFI}_{i,t}={\alpha }_0+{\alpha }_1{Enpenal}_{i,t}+{\alpha }_j\sum {Controls}_{i,t}+\sum Year+\sum Industry+{\epsilon }_{i,t}$$

(1)

$${EFI}_{i,t}={\alpha }_0+{\alpha }_1{Ensubsidy}_{i,t}+{\alpha }_j\sum {Controls}_{i,t}+\sum Year+\sum Industry+{\epsilon }_{i,t}$$

(2)

$${EFI}_{i,t}={\alpha }_0+{\alpha }_1{Enpenal}_{i,t}+{\alpha }_2{Ensubsidy}_{i,t}+{\alpha }_j\sum {Controls}_{i,t}+\sum Year+\sum Industry+{\epsilon }_{i,t}$$

(3)

$$\begin{array}{l}{EFI}_{i,t}={\alpha }_0+{\alpha }_1{Ensubsidy}_{i,t}+{\alpha }_2{Enaware}_{i,t}+{\alpha }_3{Ensubsidy}_{i,t}\times {Enaware}_{i,t}+{\alpha }_j\sum {Controls}_{i,t}+\sum Year\\ \hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{1em}\hspace{0.17em}+\sum Industry+{\epsilon }_{i,t}\end{array}$$

(4)

Among these, i is the enterprise, t is the year, EFI is the environmental–financial integration, Enpenal is the command-based pressure, Ensubsidy is the market-based pressure, Enaware is the public environmental awareness, Controls is the control variable, Year is the year dummy variable, Industry is the industry dummy variable, ${\alpha }_0$ is the constant term, ${\alpha }_1$~${\alpha }_3$ and ${\alpha }_j$ are the regression coefficients, and j = 4, 5, ……, 14, and ${\epsilon }_{i,t}$ are the residual terms.

The environmental finance index (EFI) proposed by Xu Guanghua et al. [1] and Shu Ying et al. [2] is used to measure the degree of integration of corporate environmental performance and financial performance. The index is based on the theory of environmental externalities, the theory of ecological economic systems, the theory of sustainable development, and the theory of symbiosis. In accordance with the traditional principles of “coexistence of comprehensiveness and importance”, “subjective and objective complementarity”, and the innovative principle of “financial and non-financial balance”, indicators are selected, and 18 laws and regulations related to the environment are used as the basis. Finally, the environmental financial index system consists of 29 tertiary indicators, including five secondary indexes: environmental legality, environmental communication, environmental management, green operation, and financial level (See Appendix A). The EFI score ranges from 0 to 100 points, with a higher EFI score indicating a greater degree of integration between a company’s environmental performance and its financial performance.

Command-based pressure is measured by the cumulative number of environmental administrative penalty cases in Chinese provinces and cities in the current year Enpenal. Market-based pressure is measured by the Chinese government’s environmental subsidy Ensubsidy. The moderator variable Enaware, public awareness of environmental protection, is measured by the total number of environmental proposals of the Chinese People’s Political Consultative Conference (CPPCC) and the National People’s Congress. Although these three variables—Enpenal, Ensubsidy, and Enaware—are intimately related to environmental conservation matters, they are not integral components for determining the EFI metric. Through the application of Pearson correlation coefficient analysis, it has been ascertained that none of these exhibit a strong linear relationship with each other or with EFI, having coefficients lower than the commonly used threshold of 0.5. Consequently, there is no significant indication of multicollinearity among these variables, implying that each contributes independent information to the model without causing instability due to high interdependence (See Appendix B). The Enpenal, Ensubsidy, and Enawar data are biased to the right; therefore, the logarithmic processing is taken to make it closer to the normal distribution.

In this paper, the selection of control variables is considered from the following perspectives [37,38,39]: (1) The focus corporate governance variables are controlled, which mainly include executive compensation (Compen), the degree of separation of two rights (Sep), the degree of ownership concentration (Shrhfd3), and the proportion of independent directors (Indep). (2) The characteristic variables of focus enterprises are controlled, which mainly include enterprise scale (Size), asset/liability ratio (Lev), return on total assets (Roa), net cash flow from operating activities (Opercash), and growth rate of operating income (Gsales). (3) Since the degree of regional economic development will affect the environmental input and economic benefits of enterprises, this paper also controls regional economic characteristics and institutional factors: marketization index (Freemark) [40] and gross domestic product (GDP). In this paper, we cluster the standard deviations at the firm level and the year level in the regression to control the autocorrelation effect between the firm and year residual. The definition of variables in this paper is shown in

Table 1. Variable definitions.

Variable Type	Variable Name	Abbreviation	Variable Definition and Calculation
Explained variable	Environmental–financial integration	EFI	Environmental Financial Index [1,2]
Explanatory variable	Command-based pressure	Enpenal	Natural logarithm of the number of environmental administrative punishment cases in China
	Market-based pressure	Ensubsidy	Natural logarithm of the Chinese government’s environmental protection subsidies
Regulating variable	Public awareness of environmental protection	Enaware	Natural logarithm of the total number of environmental proposals of the Chinese People’s Political Consultative Conference and the National People’s Congress
Control variable	Executive compensation	Compen	Natural logarithm of high remuneration of directors and supervisors
	Degree of separation of two powers	Sep	Actual controller of the enterprise control-ownership
	Degree of ownership concentration	Shrhfd3	The square sum of the top three shareholders
	Proportion of independent directors	Indep	Number of independent directors on the corporate board/total number of independent directors
	Enterprise scale	Size	Natural logarithm of a firm’s total assets
	Asset/liability ratio	Lev	Total current liabilities/current assets of the enterprise
	Return on total assets	Roa	Net profit after tax/total assets
	Net cash flow from operating activities	Opercash	Natural logarithm of the net cash flow generated by a firm’s operating activities
	Growth rate of operating income	Gsales	(Current main business income-previous main business income)/previous main business income
	Marketization degree	Freemark	Enterprise location marketization index
	Gross domestic product	GDP	Natural logarithm of GDP of a Chinese province for the year
	A given year	Year	Year dummy
	Industry	Industry	Industry dummy variable

.

3.3. Empirical Analysis

3.3.1. Descriptive Statistics

Displayed in

Table 2. Descriptive statistics.

Variable	Sample Size	Average	Median	Std.	Minimum	Maximum
EFI	3953	43.70	43.10	13.30	25.10	79.40
Enpenal	3953	6.74	7.22	2.09	0.69	9.93
Ensubsidy	3953	7.87	5.04	4.22	5.04	18.20
Enaware	3953	5.99	6.40	1.05	4.52	7.51
Compen	3953	15.40	15.40	0.70	13.30	17.50
Sep	3953	8.56	1.50	12.00	0.00	64.00
Shrhfd3	3953	0.17	0.14	0.12	0.01	0.63
Indep	3953	0.37	0.33	0.05	0.30	0.60
Size	3953	22.70	22.50	1.31	19.80	26.60
Lev	3953	0.42	0.41	0.19	0.05	0.95
Roa	3953	0.04	0.04	0.06	−0.25	0.22
Opercash	3953	19.80	19.80	1.64	14.30	24.30
Gsales	3953	0.19	0.08	0.92	−0.75	18.90
Freemark	3953	9.38	9.51	1.59	4.45	11.90
GDP	3953	10.60	10.60	0.68	8.40	11.60

are the descriptive statistics pertaining to the main variables within this research. With missing values appropriately addressed, our dataset includes 3953 distinct company-year instances, subject to the constraints faced during data acquisition. In the correlation test, the maximum value of VIF variance inflation factor test is 1.93, which is less than the judgment boundary 10; therefore, the multicollinearity problem between the main variables can be excluded.

3.3.2. Regression Analysis of Formal Institutional Pressure on Enterprise Environmental–Financial Integration

Table 3. The impact of command-based pressure and market-based pressure on the environment-financial integration of enterprises.

Variable	Explained Variable—Environmental–Financial Integration EFI
	(1)	(2)	(3)
	Command-Based Pressure	Market-Based Pressure	Command + Market Pressure
Enpenal	0.329		0.342
	(0.079)		(0.250)
Ensubsidy		0.377 ***	0.379 ***
		(4.295)	(4.344)
Controls	Yes	Yes	Yes
Year	Yes	Yes	Yes
Industry	Yes	Yes	Yes
N	3953	3953	3953
R2	0.366	0.377	0.378
Adj.R2	0.358	0.369	0.370

Note: *** represent the significance levels at 1%, and the t-values in parentheses are clustered and adjusted by the individual dimensions of the company.

presents the effects of command-based and market-based pressures on environmental–financial integration. In Column (1), the impact of command-based pressure on corporate environmental–financial synergy is shown, with empirical results revealing that the current year’s cumulative count of environmental administrative penalties (Enpenal) does not significantly affect this integration, despite a regression coefficient of 0.329. Conversely, Column (2) illustrates the influence of market-based pressure, demonstrating a significant positive effect at the 1% level with a regression coefficient of 0.377. Regional government environmental protection subsidies serve as an effective market-based incentive, as they can mitigate financial performance losses from enhancing environmental performance. By providing economic subsidies, governments can both help enterprises navigate their immediate financial challenges and foster a stronger subjective commitment to environmental protection. Regarding the insignificant effect of command-based pressure on environmental and financial integration, this paper posits that China’s relatively mild environmental administrative sanctions may be the reason. The fines paid by companies might not meaningfully dent their financial standing; indeed, it could prove more “cost-effective” for them to pay these fines rather than heavily invest in environmental protection measures. Therefore, the environmental performance of enterprises has not been significantly improved. Their financial performance has not been affected, and the increasing difference between the two will make the integration of corporate environment and finance decline. Column (3) shows that when both command-based pressure and market- based pressure are considered at the same time, there is little change in the impact of both on the integration of corporate environment and finance, and H1 is assumed to be valid in this paper.

3.3.3. Influence of Property Right Heterogeneity

Table 4. The impact of heterogeneity of enterprise property rights on the relationship between formal institutional pressure and corporate environmental and financial integration.

Variable	Explained Variable—Environmental–Financial Integration EFI
	Command-Based Pressure		Market-Based Pressure
	(1)	(2)	(3)	(4)
	State-Owned Enterprises	Private Enterprises	State-Owned Enterprises	Private Enterprises
Enpenal	0.422 *	0.196
	(1.763)	(0.727)
Ensubsidy			0.252	0.446 ***
			(0.046)	(3.948)
Controls	Yes	Yes	Yes	Yes
Year	Yes	Yes	Yes	Yes
Industry	Yes	Yes	Yes	Yes
N	1665	2288	1665	2288
R2	0.391	0.374	0.397	0.387
Adj.R2	0.376	0.362	0.382	0.374

Note: * and *** represent the significance levels at 10% and 1%, respectively, and the t-values in parentheses are clustered and adjusted by the individual dimensions of the company.

reveals the influence of command-based and market-based pressures on environmental–financial integration among firms with different property rights structures. In Columns (1) and (2), it is evident that command-based pressure significantly enhances the environmental–financial convergence for state-owned enterprises (SOEs), with a regression coefficient of 0.422, which is statistically significant at the 10% level. Conversely, Columns (3) and (4) illustrate that in private enterprises, market-based pressure exerts a significant effect on their environmental–financial integration, as seen from the regression coefficient of 0.446, showing a strong positive correlation at the 1% significance level, thereby confirming Hypothesis H2.

Coupled with Hypothesis H1’s findings, while market-based pressure does not have a significant impact on the overall sample’s environmental–financial integration, it positively correlates significantly within SOEs, suggesting that command-based pressure has a distinct influence on the environmental–financial integration of specific enterprise types. Broadly speaking, SOEs are more responsive to command-based pressures, whereas private enterprises are more attuned to market-oriented pressures.

3.3.4. Effects of Spatial Heterogeneity

Based on the precedent set by previous academic research [41], this study classifies Chinese listed companies as part of the Eastern Developed group if they are situated in the eastern region, while those located elsewhere fall into the Central and Western Developing group. This paper investigates the impacts of command-based and market-based pressures on environmental–financial integration among these enterprises, considering spatial heterogeneity. The empirical findings are summarized in

Table 5. The effect of spatial heterogeneity on the relationship between formal institutional pressure and corporate environmental and financial integration.

Variable	Explained Variable—Environmental–Financial Integration EFI
	Command-Based Pressure		Market-Based Pressure
	(1)	(2)	(3)	(4)
	Developed	Developing	Developed	Developing
Enpenal	0.220 ***	0.289
	(3.237)	(1.018)
Ensubsidy			0.390 ***	0.620 ***
			(3.826)	(4.014)
Controls	Yes	Yes	Yes	Yes
Year	Yes	Yes	Yes	Yes
Industry	Yes	Yes	Yes	Yes
N	2340	1613	2340	1613
R2	0.373	0.400	0.386	0.413
Adj. R2	0.360	0.384	0.372	0.398
Suest	F = 9.34, p = 0.000		F = 8.32, p = 0.000

Note: *** represent the significance levels at 1%, and the t-values in parentheses are clustered and adjusted by the individual dimensions of the company.

.

The results indicate that, within the eastern region, firms display heightened sensitivity to command-based pressure, with a regression coefficient of 0.220, which is statistically significant at the 1% level. Both in the eastern and central–western regions, market-based pressure significantly influences corporate environmental–financial integration; the corresponding regression coefficients are 0.390 and 0.620, respectively, both attaining significance at the 1% level.

Through seemingly unrelated regression estimation, it becomes evident that market-based pressure has a more pronounced effect on the environmental–financial convergence of enterprises in the central and western regions, thereby validating Hypothesis H3. Therefore, this paper suggests that for the eastern region, the government could enhance corporate environmental–financial integration by refining the emission permit trading system, increasing environmental protection tax rates, and implementing other economic measures. Meanwhile, in the central and western regions, stricter environmental emission standards can be enforced to compel companies to improve their environmental–financial integration and augment the role of command-based pressure.

3.3.5. Impact of Cultural Differences among Executives

To test hypotheses H4, this study categorizes firms based on the educational attainment of their executives. Those with advanced degrees such as master’s, doctoral, or other forms of higher education (inclusive of honorary doctorates and distance learning programs) are placed in the Hdegree group, while others fall into the Ldegree group. These data are sourced from the CSMAR database, excluding companies that do not disclose their CEO’s educational background. The regression outcomes are displayed in

Table 6. Influence of executive cultural differences on the relationship between formal institutional pressure and corporate environmental–financial integration.

Variable	Explained Variable—Environmental–Financial Integration EFI
	Command-Based Pressure		Market-Based Pressure
	(1)	(2)	(3)	(4)
	Ldegree	Hdegree	Ldegree	Hdegree
Enpenal	0.291	0.334 **
	(0.215)	(2.140)
Ensubsidy			0.376 ***	0.187
			(4.276)	(0.218)
Controls	Yes	Yes	Yes	Yes
Year	Yes	Yes	Yes	Yes
Industry	Yes	Yes	Yes	Yes
N	3628	325	3628	325
R2	0.386	0.367	0.378	0.416
Adj.R2	0.372	0.359	0.370	0.400

Note: ** and *** represent the significance levels at 5% and 1%, respectively, and the t-values in parentheses are clustered and adjusted by the individual dimensions of the company.

.

Columns (1) and (2) demonstrate the effect of command-based pressure on environmental–financial integration across executive groups with varying levels of education. It emerges that executives with high-level qualifications respond positively to command-based pressure, as reflected by a regression coefficient of 0.334, which is statistically significant at the 5% level.

Comparing columns (3) and (4), it becomes clear that executives with lower educational backgrounds are more responsive to market-driven mechanisms like government subsidies. Specifically, increased market-based pressures, exemplified by state environmental protection subsidies, significantly propel enterprises towards better environmental–financial integration, with a correlation coefficient of 0.376, signifying a positive relationship at the 1% significance level, thus validating Hypothesis H4.

These findings suggest that enhancing the role of environmental regulation in fostering environmental–financial integration within enterprises necessitates elevating the educational caliber of senior executives and nurturing their understanding of green environmental protection and ecological values.

3.3.6. Influence of Informal Institutions

The empirical evidence supporting Hypothesis H5 is presented in

Table 7. Influence of public environmental awareness on the relationship between market-based pressure and corporate environmental–financial integration.

Variable	Explained Variable—Environmental–Financial Integration EFI
	(1)	(2)
	Ldegree	Hdegree
Ensubsidy	0.111 ***	0.237 ***
	(4.340)	(3.690)
Enaware	0.106 ***	0.142 ***
	(5.627)	(5.477)
Ensubsidy × Enaware	0.667 ***	0.129 ***
	(7.968)	(5.168)
Controls	Yes	Yes
Year	Yes	Yes
Industry	Yes	Yes
N	3953	3953
R2	0.273	0.379
Adj. R2	0.265	0.370

Note: *** represent the significance levels at 1%, and the t-values in parentheses are clustered and adjusted by the individual dimensions of the company.

. The outcomes from columns (1) and (2) indicate that public environmental consciousness positively influences corporate environmental–financial integration, both before and after incorporating control variables. The regression coefficients are recorded as 0.106 and 0.142, respectively, each showing statistical significance at the 1% level. Furthermore, these results also demonstrate that heightened public environmental awareness amplifies the positive correlation between market-based pressure and the convergence of corporate environmental finance. The regression coefficients for this relationship stand at 0.667 and 0.129 correspondingly, both reaching statistical significance at the 1% level, thus validating Hypothesis H5. In summary, public environmental awareness not only directly enhances the integration of environmental and financial strategies within companies but also potentiates the effectiveness of market-based pressures to drive such integration, thereby confirming the hypothesis under examination. Combined with institutional theory, this paper argues that the expansion of corporate behavior will reach a critical point, at which catering to public environmental awareness is not to improve performance but to provide legitimacy. Strategies that are rational for a single organization may be irrational once they are adopted by the majority, but they increase the likelihood of strategic rationality when they are adopted by socially accepted norms.

Therefore, as public environmental consciousness shapes the operational landscape, reputation, and market demand of enterprises, government environmental protection subsidies serve as a potent external incentive mechanism that can further bolster corporate investments in aligning their environmental performance with financial performance. Public concern about environmental issues has given the government more incentive to introduce environmental policies, which may include incentives such as environmental subsidies for environmental actions. This policy provides enterprises with the opportunity to reduce environmental costs and achieve environmental–financial integration. In this context, enterprises will be more motivated to take advantage of the incentives provided by the government to actively adopt environmental measures and achieve the integration of environmental performance and financial performance. Through government environmental protection subsidies, enterprises can reduce the cost of environmental protection investment, enhance the environmental image, better meet the expectations of the public and the market, and achieve sustainable business development.

4. Robustness Test

4.1. Test of Regional Difference

In China, there exists a certain degree of imbalance in the distribution of the number and influence of state-owned enterprises across different regions. When examining the environmental–financial integration performance of enterprises in various regions, it is imperative to recognize that such regional disparities in the presence and influence of state-owned enterprises could potentially act as a confounding variable, which may obscure or distort the accurate identification of regional characteristics’ genuine impact on environmental–financial integration, thereby diminishing the precision and reliability of our analysis concerning regional influencing factors.

Consequently, in order to ensure that research findings are not compromised by unobservable regional-level variables, this study employs a regional fixed effects model for robustness testing. This approach involves incorporating regional fixed effects into the analytical model, which effectively captures unique, constant, and unobserved attributes across regions using a set of dummy variables. By doing so, we aim to more accurately assess and interpret the actual role of regional factors on the state of environmental–financial integration, thereby enhancing the credibility and generalizability of the research conclusions. The regression outcomes are showcased in columns (1), (2), and (3) of

Table 8. Robustness test: Formal institutional pressure and corporate environmental–financial integration.

Explained Variable	EFI			EFI
Variable	(1)	(2)	(3)	(4)	(5)	(6)
	Command-Based Pressure	Market-Based Pressure	Command + Market Pressure	Command-Based Pressure	Market-Based Pressure	Command + Market Pressure
Enpenal	0.013		0.035	0.351		0.370
	(0.027)		(0.029)	(0.482)		(0.756)
Ensubsidy		0.011 ***	0.021 ***		0.395 ***	0.398 ***
		(6.325)	(7.357)		(3.918)	(3.958)
Controls	Yes	Yes	Yes	Yes	Yes	Yes
Constant	2.434 ***	2.798 ***	2.575 ***	−51.943 ***	−51.343 ***	−48.059 ***
	(9.246)	(8.385)	(7.983)	(−5.352)	(−5.323)	(−4.993)
Year	Yes	Yes	Yes	Yes	Yes	Yes
Industry	Yes	Yes	Yes	Yes	Yes	Yes
N	3953	3953	3953	239	239	239
R2	0.377	0.324	0.313	0.360	0.371	0.373
Adj. R2	0.365	0.298	0.287	0.352	0.364	0.365

Note: *** represent the significance levels at 1%, and the t-values in parentheses.

. The hypothesis remains valid.

4.2. Test of Sample Selection Bias

In 2005, the outline of China’s 11th Five-Year Plan clearly proposed to “control the export of high energy consumption, high pollution and resource products, and promote the upgrading of domestic industries”, and has since provided great policy assistance to such enterprises. Over the next two decades, companies in the industry grew rapidly. However, due to the imperfection of early environmental supervision and environmental assessment, many of these projects sacrifice the environment in exchange for economic benefits, among which the mining industry is the most serious. Therefore, this paper selected samples precisely of enterprises in the mining industry to conduct a robustness test. The regression outcomes are showcased in columns (4), (5), and (6) of Table 8, which corroborate the main hypothesis conclusion. Command-based pressure does not exert a statistically significant influence on enhancing corporate environmental and financial integration, whereas market-based pressure significantly drives improvement at the 1% level. The robustness tests of the remaining hypotheses are not disclosed due to the length of the paper, but all of them meet the above assumptions, reflecting the robustness of the model to a certain extent.

5. Conclusions

5.1. Research Conclusions

Although both command-and-control measures and market-driven policies can contribute to enhancing the environmental–financial integration of specific companies, market-oriented strategies are more effective in promoting corporate autonomy and decision-making flexibility. Moreover, government-provided environmental protection subsidies and other economic incentives enable enterprises to better comprehend and respond to the economic implications of environmental protection, thereby optimizing the synergy between their environmental performance and financial outcomes.

This study zeroes in on the effects of command-based and market-based pressures on the environmental and financial convergence of listed corporations operating in China’s heavily polluting sectors. Through empirical analysis, it is observed that these effects exhibit notable variations. Despite the prevalence of stringent command systems in China, market-based regulations may wield a more substantial influence over the environmental–financial alignment within businesses. This disparity becomes even more pronounced when considering the heterogeneity across property rights structures, spatial differences, and the educational diversity among senior executives.

The specific findings can be summarized as follows: (1) In the context of corporate environmental and financial integration, market-based pressures have a more pronounced effect compared to command-based measures. (2) With respect to property rights heterogeneity, command-based pressure significantly impacts environmental–financial integration in state-owned enterprises, whereas market-based pressure exerts a significant influence on privately owned businesses. (3) The spatial disparities resulting from China’s uneven economic development lead to differential responses to these pressures: firms in eastern regions tend to respond more keenly to command-and-control policies, while those in central and western regions, due to their economic constraints, may find market-driven mechanisms like environmental protection subsidies more effective. (4) Executives with lower educational backgrounds can leverage government economic policies to overcome cultural limitations, while those with higher education levels are better equipped to identify potential opportunities within stringent regulations, thereby enhancing their companies’ environmental and financial integration capabilities.

5.2. Enlightenment and Suggestion

Stringent policy systems, particularly environmental protection laws and regulations, as well as administrative policies, play a crucial role in effectively reducing enterprises’ likelihood of environmental pollution and enhancing corporate legitimacy standards. However, given the heterogeneity across industries in China, a one-size-fits-all policy regime might further exacerbate challenges faced by heavily polluting industries under dual pressures of economic growth and emission reduction. Thus, it is recommended that the Chinese government address this issue through the following approaches to develop more scientifically sound and rational top-level designs for environmental protection policies:

(1) Further refinement of command-and-control policies. For instance, tailor or refine water, air, and soil pollution regulations for different industries. Raise entry barriers for high-energy-consuming, highly polluting, and resource-intensive sectors, advancing cleaner production processes. Implement accelerated phasing-out mechanisms for enterprises lagging in environmental technologies and capacity utilization, thereby improving overall resource efficiency.

(2) Enhance the role of market-based policies. Guide businesses towards fulfilling their environmental responsibilities via appropriate economic policies, such as refining existing environmental tax, carbon tax, and resource tax regimes; expediting the establishment of a nationwide emissions trading market; and instituting favorable taxation policies, fiscal subsidies, and other incentives. While both command-and-control and market-based policies can alleviate the dual pressure on businesses, considering China’s current national conditions and regional economic disparities, excessively stringent command-and-control policies may overwhelm firms, leaving them little room to focus on green innovation. Hence, the government should prioritize the formulation of market-based policies, particularly for enterprises in central and western regions. Support can be offered through fiscal subsidies, green loans, green bonds, green procurement, and green industrial parks to help these businesses overcome economic difficulties during their green technology transition, ultimately promoting a joint enhancement of their environmental and financial performances.

(3) Promote the formation of a market-oriented culture. Departing from the past’s enterprise-centric perspective, a market-oriented approach requires businesses to respond to market demand and align with consumer preferences. When stakeholders increasingly value environmental protection and prefer green products, enterprises will be incentivized to improve their environmental performance for better economic outcomes. Therefore, akin to Confucian thought, the widespread promotion of a market-oriented culture and strengthened ecological ethics construction is advocated. Initiatives like fostering a universal sense of environmental protection, encouraging energy saving and emission reduction among the populace, and nurturing a positive societal ethos around pollution control can positively guide businesses toward achieving a symbiotic improvement in both environmental and financial performances. This includes cultivating a green public opinion environment, a green consumption environment, and a green educational environment.

5.3. Research Innovations and Future Research Directions

5.3.1. Research Innovations

(1) Unearthing the Interactions Between Formal Institutions and Corporate Environmental–Financial Integration: This study breaks new ground beyond the existing literature, which mainly focuses on the singular impact of formal institutions on either corporate environmental performance or financial performance. It is the first to systematically investigate how formal institutions specifically affect the process of integrating corporate environmental and financial performance. By comparing different types of formal institutions (command-and-control vs. market-based policies) and considering the variations in property rights structure, geographical location, and executive cultural levels across diverse enterprises, this research reveals the complex dynamic relationship between formal institutions and the corporate environmental–financial integration, filling a significant gap in this area of research.

(2) Fine-grained Analysis of Differential Responses to Formal Institutions According to Enterprise Characteristics: This paper innovatively narrows down the scope of analysis, not only focusing on the direct effects of formal institutions but also paying particular attention to the differential responses of corporations to various institutional pressures concerning their environmental–financial integration. This study encompasses state-owned enterprises, private enterprises, and other types with different property rights structures, as well as regional disparities between economically advanced and underdeveloped areas, along with the influence of executive cultural levels on environmental–financial integration. Such meticulous analysis offers robust empirical support and strategic guidance for enterprises and governments to tailor-make and implement environmental policies and enhance the degree of integration between environmental and financial performance in a localized and targeted manner.

5.3.2. Future Research Directions

(1) It is important to note that the extent of environmental and financial integration in corporations discussed in this paper is constrained by the manually collected sample data, with current research confined to listed companies operating in heavily polluting industries within China. The findings may not be universally applicable across different sectors due to industry heterogeneity; thus, specific circumstances for listed firms in other sectors could vary significantly. Moreover, within the heavily polluting sector, this study has not yet delved into industry sub-segments. Although there are considerable similarities among companies within this category, their unique industry-specific traits merit further exploration and analysis.

(2) In the selection of formal institutional pressure, this paper only considers the different influences that may be brought by command-based pressure and market-based pressure and has not yet further discussed their specific correlation, which is also the direction of our future efforts.