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The unintended consequences of environmental regulation on financial misconduct

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  • Guo, Junfei
  • Sun, Rui
  • Zhao, Mingduo

Abstract

Using China’s 2015 New Environmental Protection Law (NEPL) as a backdrop, we examine the unintended connection between environmental regulations and the increase in financial misconduct. Leveraging a difference-in-differences (DID) approach based on the exogenous shock of NEPL on heavily polluting firms, our analysis reveals heightened financial misconduct post-NEPL. The primary drivers are intensified green expenditure pressures, corporate governance, and executive traits. Further evidence shows that neither financial regulation nor media scrutiny intensified after the NEPL, suggesting that the effect stems from firms’ internal adjustments rather than external detection. Our findings underscore the unforeseen interplay between sustainability initiatives and corporate financial behaviors, offering vital insights for policymakers and enriching the understanding of environmental regulations and corporate finance intersections.

Suggested Citation

  • Guo, Junfei & Sun, Rui & Zhao, Mingduo, 2026. "The unintended consequences of environmental regulation on financial misconduct," Journal of Financial Stability, Elsevier, vol. 84(C).
    • Handle: RePEc:eee:finsta:v:84:y:2026:i:c:s1572308926000215
    DOI: 10.1016/j.jfs.2026.101519
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    Keywords

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    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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