Seeking the Shelter of Governments: The Unintended Consequence of Environmental Regulation on Firm Ownership Dynamics

Ni Qin and Dongmin Kong

Economic Development and Cultural Change, 2024, vol. 72, issue 3, 1391 - 1423

Abstract: We examine the causal effect of environmental regulation on firm ownership dynamics. China’s central government took the reduction of sulfur dioxide (SO2) emissions as the main performance evaluation criterion for local government leaders in 2005. Based on a difference-in-differences framework, our results show that environmental regulation increases firms’ state shareholdings, and these findings are robust to various endogeneity and sensitivity analyses. In particular, stringent regulations increase firms’ production costs, thus reducing their expected profits and causing undue burden on them. As a result, firms seek the shelter of governments by introducing more state shareholdings to escape stricter environmental regulations or to obtain invisible benefits. Our results are more significant in regions with low corruption, high transparency, or poor external business environments and highly polluting firms.

Date: 2024
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