Do environmental regulations affect firm financial distress in China? Evidence from stock markets

Yu He and Huan Zheng

Applied Economics, 2022, vol. 54, issue 38, 4384-4401

Abstract: This study explores how environmental regulations affected firm financial distress in China from 1999 to 2018, when the national strategy experienced a major adjustment from economic development only to sustainable growth. Instead of targeting specific environmental policy, we divide environmental regulations for firms into two major types, including energy conservation and pollution reduction, and discuss the influences of the overall levels of Chinese environmental regulations in the last two decades. We find that these regulations were negatively associated with firm performance, positively related to the possibility of financial distress, and negatively associated with the length of distress time. Our additional tests also show that the two types of environmental regulations had different influences on firm financial distress for various firm characteristics, including state ownership and industries. The empirical results remain robust when alternative measures of financial distress and potential endogenous issues are controlled.

Date: 2022
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DOI: 10.1080/00036846.2022.2030048

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