Carbon Reduction Pressure and Internal Capital Transfer Within Business Groups: Evidence From China's Carbon Emission Trading

ABSTRACT Using China's pilot carbon emission trading (CET) policy as an exogenous shock, this paper examines how carbon reduction pressures influence internal capital allocation within business groups. We find that CET‐induced carbon reduction pressure simultaneously enhances firms' capital optimisation motivation and increases financing pressure, driving internal capital transfers from subsidiaries to parent companies. Significantly, this effect is heterogeneous across firms with different characteristics and CET participation statuses. Moreover, such transfers enhance both environmental performance and firm value. Overall, our results advance the understanding of internal capital transfers under carbon reduction pressures and provide insights into achieving global carbon reduction targets.