Threshold effects of carbon cost internalization on financial performance in green bio-manufacturing enterprises

Abstract

This study examines how carbon cost internalization (CCI) affects the financial performance of green bio-manufacturing enterprises, with particular attention to threshold nonlinearities and transmission mechanisms. Using a panel of 484 Chinese A-share bio-manufacturing firms from 2010 to 2023 (N = 6958 firm-year observations), we construct a five-component CCI index via principal component analysis and apply Hansen (1999) double-threshold regression to identify two critical turning points at CCI= 0.342 and CCI= 0.586. Regime-specific estimation reveals that the CCI-to-ROA coefficient rises monotonically across the three regimes: 0.028 in the low-internalization regime, 0.092 in the intermediate regime, and 0.148 in the high-internalization regime, indicating that financial returns to carbon cost absorption are superlinear rather than proportional. Bootstrap mediation analysis identifies four transmission channels: green technology innovation (29.5%), ESG performance improvement (21.6%), capital structure adjustment (15.9%), and supply chain decarbonization (11.6%), collectively explaining 78.6% of the total CCI effect on ROA. Moderation analysis confirms that the CCI-financial performance relationship is amplified for firms in high-carbon-intensity industries and for those operating under China's Emissions Trading Scheme. Results are robust to IV-2SLS using emission permit allocation as an instrument, system-GMM, PSM-DiD, and eight additional specification checks. The findings provide empirical support for the Porter Hypothesis in the bio-manufacturing context and carry direct policy implications for the design of carbon trading mechanisms and green industry support programs.