LAUSR

This study examines how environmental regulatory shocks affect the supply chain configuration of highly polluting firms, a relatively understudied area in the sustainable operations literature. Using a panel dataset of Chinese A‐share listed firms from 2009 to 2022, we employ a Difference‐in‐Differences (DID) design to examine the causal impact of China's 2015 environmental policy reform on supply chain centralization. The results show that the supply chain structure of highly polluting firms shifted significantly towards centralization under the policy shock. Firms' green transformation and financial difficulty moderate this effect. Further heterogeneity analyses show that resource strength, geographical location, and dependence on external resources largely determine firms' adaptive responses. These findings underscore environmental regulations' strategic yet often overlooked impact on firms' supply chain decisions. They offer practical implications for policymakers seeking to align environmental objectives with industrial competitiveness and for managers responding to regulatory uncertainty through supply chain restructuring. Furthermore, this study enriches literature by establishing an empirical link between environmental regulation and supply chain design and uncovering the mediating mechanisms through which policy interventions influence firm strategy and sustainability outcomes.