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Governmental inspection and firm environmental protection expenditure: Evidence from China

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  • Qian, Xuesong
  • Ding, Hai
  • Ding, Zifang

Abstract

There has been much debate about whether firms will allocate capital for environmental protection, which highlights the importance of promoting and motivating firms to invest in the environment. Using China's central inspection of firms' environmental protection as a natural experiment, this paper adopts a difference-in-differences method to investigate how these government inspections affect firms' environmental investments. Empirical results show that firm environmental investment is significantly higher in inspected regions than in uninspected ones. By strengthening law enforcement, government inspections can have a significant impact on firms' environmental decision-making processes. As firms improve their environmental behaviour, central inspections promote reductions in pollutant emissions, which facilitates greener and cleaner production methods. However, the higher compliance costs for businesses under these tighter regulations squeeze corporate activity and margins. This paper reveals the micro-mechanisms behind the real effects of government inspections on firms' environmental investments, providing timely implications for regulators concerned with environmental protection.

Suggested Citation

  • Qian, Xuesong & Ding, Hai & Ding, Zifang, 2023. "Governmental inspection and firm environmental protection expenditure: Evidence from China," Economic Modelling, Elsevier, vol. 123(C).
    • Handle: RePEc:eee:ecmode:v:123:y:2023:i:c:s0264999323000962
    DOI: 10.1016/j.econmod.2023.106284
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    Cited by:

    1. Guixiang Cao & Jinghuai She & Chengzi Cao & Qiuxiang Cao, 2024. "Environmental Protection Tax and Green Innovation: The Mediating Role of Digitalization and ESG," Sustainability, MDPI, vol. 16(2), pages 1-26, January.
    2. Ma, Xinru & He, Jingbin, 2023. "Air pollution and corporate green innovation in China," Economic Modelling, Elsevier, vol. 124(C).

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    More about this item

    Keywords

    Central inspections; Environmental protection expenditure; Quasi-natural experiment; Environmental regulation;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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