Carrot or Stick? Green Finance, Regulatory Distance and Green Total Factor Productivity of Manufacturing Enterprises

Abstract Green finance represents a transformative policy innovation designed to incentivize corporate environmental stewardship and accelerate sustainable economic development. However, the effectiveness of green finance in enhancing firm-level environmental performance remains underexplored, particularly considering the role of regulatory oversight. This study investigates how green finance policies impact Enterprise Green Total Factor Productivity (EGTFP), incorporating the moderating effect of regulatory distance. Using a Difference-in-Differences (DID) approach and the 2017 Green Finance Reform and Innovation Pilot Zones in China as a quasi-natural experiment, we analyze A-share listed manufacturing firms from 2010 to 2022. Our findings reveal that green finance initiatives significantly boost EGTFP, especially among firms with environmentally-experienced executives, state-owned ownership, heavy pollution profiles, and those operating in more economically developed, market-oriented, and digitally inclusive regions. Mechanism analyses indicate that green finance policies foster green technological innovation, mitigate financing constraints, and promote environmental investments, thereby internalizing environmental costs. Furthermore, greater regulatory distance weakens the positive effects of green finance on firms' green productivity. These results highlight the necessity of bridging financial instruments and environmental regulatory frameworks to maximize the effectiveness of green finance. Strengthening coordination between financial institutions and regulatory authorities is crucial to advancing the green transformation of the manufacturing sector.