Breaking the green investment dilemma of heavily polluting firms: Evidence from carbon market trading through the Lens of signaling and risk sharing

This study explores whether carbon market trading can help overcome the “green investment dilemma” faced by heavily polluting firms, with particular emphasis on signaling and risk-sharing mechanisms. Drawing on a panel dataset of Chinese A-share listed companies, the analysis reveals that carbon trading significantly promotes firm-level green investment, especially among enterprises with initially low environmental engagement. The signaling mechanism operates as firms observe peer participation in carbon markets and respond by aligning with emerging environmental norms. Meanwhile, the risk-sharing mechanism captures firms' strategic response to increased earnings volatility under carbon regulation, leading them to invest in green projects as a hedge against future uncertainty. Together, these mechanisms illustrate how market-based environmental regulation can reshape corporate investment behavior through both informational and financial channels. The findings offer new theoretical insight into the interaction between environmental policy and firm strategy, and carry important implications for the development of carbon market systems in emerging economies.