Enterprise characteristics and incentive effect of environmental regulation

Chunyu Guo, Wenjie Ma, Cunyi Yang and Runze Yang

International Review of Finance, 2025, vol. 25, issue 3

Abstract: This study examines the incentive effects of environmental regulations—penalties, subsidies, and taxes—on corporate environmental investments, considering financing constraints and executives’ political connections. Findings reveal that penalties and taxes are more effective for firms with weaker financing constraints, while subsidies benefit those facing greater constraints. Political connections weaken the impact of penalties but enhance subsidy access and effects. Tax compulsion strengthens incentives for politically connected firms, and tax rebate policy amplify penalties’ effectiveness. Executive compensation also channels penalties’ influence. The study highlights the complementary nature of regulatory tools and advocates a multifaceted approach combining cost‐based, reward‐based, and market‐driven measures to promote environmental transformation.

Date: 2025
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