Does fiscal decentralization promote firm green transformation?

Against the backdrop of China’s dual-carbon strategy and the growing demand for high-quality green development, understanding how institutional arrangements shape firms’ green transition is increasingly important. This study investigates whether fiscal decentralization promotes corporate green transformation and through which channels such effects operate. Using 2007–2024 panel data of Chinese A-share listed firms, we measure firm-level green transformation through green total factor productivity based on the slack-based measure model with multiple outputs index (SBM-ML), and construct a city-level fiscal decentralization indicator to capture local governments’ fiscal autonomy. The empirical results show that fiscal decentralization significantly enhances firms’ green transformation. Mechanism analyses further demonstrate that this effect operates through three channels: strengthened environmental regulation, increased government subsidies, and improved green technological innovation. Moreover, the role of fiscal decentralization is more pronounced in regions with a more developed green financial system, suggesting that green finance enhances the effectiveness of fiscal decentralization in facilitating green upgrading. This study contributes to the literature by linking fiscal institutions with firm-level green performance and uncovering the multidimensional pathways through which fiscal decentralization affects green development. The findings provide important policy implications for optimizing fiscal decentralization arrangements, improving green financial systems, and promoting the coordinated advancement of environmental governance and corporate green transformation.