ABSTRACT China's economy has transitioned to a phase of high‐quality and sustainable development, with resource allocation now focusing on the integrated distribution of industrial and capital chains. This study examines the financing function and signaling effect of trade credit financing in the context of sustainability, utilizing the theories of comparative advantage in finance and signaling. This study analyzes the influence of trade credit financing on the corporate environmental performance (CEP) of A‐share listed firms in China from 2009 to 2022. The findings indicate that trade credit financing can markedly enhance CEP. This finding remained robust even after considering potential endogeneity. Furthermore, according to Corporate Governance Theory , both internal and external governance of firms can moderate the relationship between trade credit finance and CEP. Moreover, the mediating analysis reveals that trade credit financing influences CEP primarily through its finance function and signaling effects. Finally, trade credit financing has heterogeneous effects on different types and characteristics of firms. Our findings offer compelling evidence to thoroughly investigate the noneconomic ramifications of trade credit financing and support firms' sustainability objectives.
Liu et al. (2025) studied this question.