Improving the sustainable development of firms: Evidence from the environmental constraint target policy in China.

Our study focuses on a new environmental policy tool, environmental constraint target policy, which minimizes the implementation bias of environmental objectives through effective decomposition of environmental targets and goal management, thus ensuring the expected environmental performance. Using longitudinal data (2006–2019) covering 11,252 Chinese firm‐year observations in high‐pollution industries, we find that environmental constraint target policy promotes firms' green innovation. Such an effect is stronger when the firms are intensively monitored and weaker when the firms are located in a region with lower environmental enforcement capability. Further analysis reveals that environmental constraint target policy can enhance firms' economic performance by promoting green innovation, thereby facilitating sustainable development. [ABSTRACT FROM AUTHOR]