AbstractUsing the introduction of Measures for the Disclosure of Environment Information (MDEI) in China, we investigate the relationship between environmental disclosure and firms’ financial constraints. We find that cash‐cash flow sensitivity decreases by 13.33% after the implementation of MDEI and that an increase of one point in the disclosure quality score results in an estimated reduction of 0.86% in cash‐cash flow sensitivity. We further find that the negative association between disclosure quality and cash‐cash flow sensitivity is more pronounced for high‐polluting firms, as well as for firms with effective internal control. Our study highlights the importance of a government environmental policy in emerging markets.