The clean development mechanism and corporate financial performance: Empirical evidence from China

The Clean Development Mechanism (CDM) is one of the “flexibility mechanisms” defined in the Kyoto Protocol to deal with global climate change. This paper uses the event study methodology to determine the relationship between corporate CDM adoption and financial performance. We conjecture that implementing CDM projects is beneficial for non-core business returns but not corporate profitability because firms often have an ulterior motive in obtaining direct economic revenue from CDM projects without expending due effort on environmental protection and efficiency improvement. We extract a list of companies with operational CDM projects in China and identify them as the sample group. Using the propensity score methodology, we establish a control group based on estimations using a probit regression model that verifies the factors determining industrial companies' participation in CDM projects. The control group comprises non-adopters of CDM projects that have a similar propensity score to CDM adopters based on their corporate financial indicators. The results from Wilcoxon signed-rank tests and one-sample binomial tests show that the major positive financial effect of CDM adoption is obtained from the growth of non-core business revenue. The profitability of the adopters is not significantly changed after the CDM adoption. There are no remarkable changes in sales growth after CDM certification.