Inter-firm cross-shareholding is the practice of two or more firms holding shares in each other’s firms. Companies create business alliances through cross-shareholding, which helps them share resources, reduce production costs and expand production scale (Ranjan, 1998; Boyatzis et al., 2015), and improve financial performance and corporate governance (Farrell and Shapiro, 1988; Ranjan, 1998). Cross-shareholding is classified into two types: one-way cross-shareholding and two-way cross-shareholding. The cross-shareholding models in China are predominantly one-way cross-shareholding (Guo H. et al., 2021); therefore, this article defines the concept of cross-shareholding using one-way cross-shareholding, i.e., firm A holds shares of firm B, but firm B is not required to hold shares of firm A at the same time (Flath, 1992).

Cross-shareholding is mainly used to reduce operation risks (Williamson, 1979), resist hostile takeovers (Nyberg, 1995), and increase financial returns (Amundsen and Beergman, 2002). The special inter-firm relationship of cross-shareholding can help overcome certain flaws of external mechanisms, which is critical to China’s economic transformation (Peng et al., 2019; Bourgeois-Bougrine, 2020). Inter-firm cross-shareholding has become very popular in Chinese capital market due to China’s active shareholding reform, continuous stock market expansion, rising demand for capital operations, and the arbitrage motivations of short-term capital flow (Peng et al., 2019). Another possible explanation for the rise of cross-shareholding in China is that the society places a high value on social relationships and networking (Xue et al., 2021), and so corporate finance happens to be highly dependent on social ties (Talavera et al., 2012; Su et al., 2020). Inter-firm cross-shareholding has a relatively strong synergistic effect among Chinese firms in terms of enhancing information advantages (Cohen et al., 2008), corporate cooperation (Uzzi, 1999), and financing capacity (Rauch and Casella, 2003).

Through cross-shareholding, listed firms can form a stable strategic alliance with equity ties (Gibb and Li, 2003), which allows them to share resources, reduce production costs and expand production scale, achieve economies of scale (Ranjan, 1998; Park and Luo, 2010) and improve corporate governance (Farrell and Shapiro, 1988; Ranjan, 1998), ultimately improving financial performance (Singh and Delios, 2017). At the same time, cross-shareholding can protect firms from hostile takeovers, reduce risks, and increase profits. Firms that cross-hold shares can not only earn dividends from equity, but also achieve higher financial performance as a result of industry chain integration and complementary advantages (Brooks et al., 2018).

Environmental investment refers to the total expenses related to environmental practices such as pollution control and environment improvement, which belong to a special type of corporate investment (Ehresman and Okereke, 2015). Environmental investment pursues economic, environmental, and social returns, but the latter two tend to outweigh the economic returns (Ehresman and Okereke, 2015). Environmental investments do not generate direct capital inflows, and they often require significant extra expenditure on environmental facilities and technologies, leaving firms with little incentives to practice (Orsato, 2006). Based on factor endowment hypothesis, corporate environmental investment decisions are the tradeoff between costs and returns (Leiter et al., 2011). Firms thus tend to lack motivations to make voluntary environmental investments. However, firms can benefit from investing in pro-environmental activities. On the one hand, higher environmental investment implies a reduction in the cost of environmental compliance (Maxwell and Decker, 2006). On the other hand, firms enjoy better reputation by delivering a positive and environmentally friendly image to the public (Wei and Zhou, 2020).

Corporate environmental investment is susceptible to both external and internal factors. The external factors primarily include the degree of government intervention and institutional constraint, and regional economic development (Saltari and Travaglini, 2011; Ducassy and Montandrau, 2015; Huang and Lei, 2021). Internal factors are mainly corporate financial performance (Blanco et al., 2009) and internal governance (Wei and Zhou, 2020); for example, a healthy financial position makes it easy for businesses to make environmental investments (Blanco et al., 2009).

Cross-shareholding is critical for improving corporate performance. Through cross-shareholding, a strategic alliance with equity ties can be formed between firms, which helps firms to reduce production costs and expand production scale through information sharing and technology complementation, thus achieving economies of scale (Ranjan, 1998) and higher financial performance (Nyberg, 1995). Moreover, cross-shareholding shields firms from hostile takeovers while simultaneously lower risks and increase profits. Firms can benefit not just from dividends generated from cross-holding stocks, but also from improved financial performance as a result of industry chain integration or complementary advantages (Brooks et al., 2018). Corporate environmental investment is commercial investment; thus, firms’ financial performance will have a direct impact on the scale of their environmental investment, and a healthy financial position is helpful in promoting environmental investment (Blanco et al., 2009).

Furthermore, cross-shareholding is conducive to reducing managerial myopia and speculative behaviors (Gilson and Roe, 1993; Guo L. X. et al., 2021) and so encouraging firms to pay more attention to long-term benefits. Managers are more inclined to make environmental investments when the purpose is to maintain corporate reputation, social image, and sustainable development. And the reduction of management speculative behavior can lead to more compliant business operations (Rocha and Salomão, 2019). When firms are under stringent government environmental regulations, they are incentivized to reduce environmental compliance costs by increasing environmental investment (Maxwell and Decker, 2006; Bierbaum et al., 2020).

Taken together, cross-shareholding may increase corporate environmental investment by enhancing financial performance and reducing managerial myopia and speculative behaviors. Based on this, this article proposes the following hypothesis:

Although firms play an important role in social and environmental development, their incentives to fulfill environmental responsibility might change as their ownership structure shifts. In China, state-owned enterprises (SOEs) are closely tied to the government and they control the bulk of economic resources (Li and Wang, 2021). However, besides economic responsibility, SOEs are expected to take on social responsibility as well, and thus they are more susceptible to government policies, particularly strategic and social policies (Lin and Tan, 1999; Xue et al., 2019). Moreover, since government support such as financial and policy support is heavily tilted in favor of SOEs, SOEs suffer considerably less financial pressure than non-SOEs (Lin, 2021). When the state has more protection and supervision over SOEs, they become more susceptible to state intervention (Kornai, 1986). As a result, in the context of China’s active national campaign for low-carbon transition and carbon neutrality, SOEs are more likely to make green investment. Therefore, we propose the following hypothesis:

Firms’ responses to market changes differ by industry, as do government macro control policies (Halme and Huse, 1997). As a major resource consumer and polluter, firms are obliged to take environmental responsibility, which is also reflected in one of China’s environmental policies of ‘‘assigning responsibility to those who created pollution to clearing it up’’¹. Since heavy polluting industries cause more environmental problems, they are subject to more government oversight, which means higher environmental compliance costs and, as a result, a larger scale of environmental investment (Chang et al., 2021). Chinese government has been aggressively promoting sustainable development by stepping up efforts to preserve the ecological environment and control carbon emissions. The Chinese environmental protection authorities have issued regulations, such as the Notice on Further Regulating the Environmental Evaluation of Companies Applying for Listing or Refinancing in the Heavy Pollution Industry² and the Regulation on Management of Inventory of Pollutant Discharging Units subject to Key Management³, further strengthening the supervision and punishment mechanism for heavy polluting industries. As a result, the heavily polluting industries face much stronger external regulation than low polluting industries (Wang et al., 2021). Therefore, in order to reduce the cost of environmental compliance, heavy polluters are more likely to invest in environmental measures or projects. Based on this, this article proposes the following hypothesis:

This article uses Chinese listed firms in the A-share stock market from 2014 to 2019 as the research setting, of which the cross-shareholding data are sourced from the Wind financial database⁴ and the environmental investment data are retrieved from the accrued expenses related to environmental practices in the notes appended to corporate financial statements. The control variables used in this article are sourced from the China Stock Market & Accounting Research Database (CSMAR)⁵, and the raw data were pre-processed based on the following screening principles: (1) excluding ST, ST^∗, and delisted firms; (2) excluding samples with missing data from 2014 to 2019. Finally, we reached 1,122 firm-year observations.

This section introduces the dependent variable, explanatory variable, and control variables, and presents descriptive statistics and the correlation matrix for all variables as shown in Table 1.

This article examines the impact of cross-shareholding on corporate environmental investment using Chinese listed companies from 2014 to 2019 as the research setting, and estimates the following regression. The regression results for the impact of cross-shareholding (Env) on corporate environmental investment (Inv) are shown in Table 2.

Model (1) controls for firm fixed effect (Firm FE) with no control variable added. Model (2) adds year fixed effect (Year FE) to Model (1). Model (3) adds the control variables of basic firm characteristics, financial indicators and insider control issues, including firm age (Age) and firm size (Size), profitability (Roe), financial leverage (Lev), growth ability (Growth), financial constraint (Cash), and the shares percentage of the largest shareholder (First), and controls for firm and year fixed effects.

The results demonstrate that there is a positive and significant impact of cross-shareholding on corporate environmental investment across all regressions. Therefore, cross-shareholding has a positive impact on environmental investment, supporting Hypothesis 1.