Does stringent environmental regulation reduce the overinvestment of high polluting firms? – Quasi-natural experiment evidence from China’s new “environmental protection law”

Jingyi Yang, Caiqi Bu and Daqian Shi

Journal of Environmental Planning and Management, 2023, vol. 66, issue 6, 1167-1188

Abstract: This article studies the impact of stringent environmental regulation on the investment behavior of firms. Using panel data for Chinese listed firms from 2009 to 2018, we take the implementation of the new environmental protection law (NEPL) in 2015 as a quasi-natural experiment and identify its impact on reducing overinvestment of high polluting firms. Further, for the potential mechanism, we find that the reduction in agency costs and the decrease in the financing caused by NEPL can help to alleviate overinvestment problems. Considering the heterogeneity of firms, NEPL has a greater effect on state-owned firms and large-scale firms, which have serious overinvestment problems. Our empirical evidence strongly supports that NEPL can realize a win-win situation for the environment and the economy.

Date: 2023
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DOI: 10.1080/09640568.2021.2017268

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