The Impact of the Vertical Management Reform of Environmental Protection Agencies on Firms’ Total Factor Productivity

This paper treats the 2016 reform of the vertical management of environmental protection agencies as a quasi-natural experiment. Using data from Chinese A-share-listed companies on the Shanghai and Shenzhen stock exchanges from 2012 to 2022, we employ a multi-period difference-in-differences (DID) approach to examine the impact of environmental governance structural reforms on firms’ total factor productivity (TFP). The study finds that the vertical management reform of environmental protection agencies significantly suppressed TFP in pilot regions. This conclusion remains valid after robustness tests, including parallel trend tests, placebo tests, PSM-DID, alternative TFP estimation methods, and the exclusion of contemporaneous policy disturbances. Mechanism tests suggest that the reform may affect firm productivity by weakening firms’ technological innovation capabilities and reducing capital allocation efficiency; further green innovation tests did not find a significant innovation compensation effect. Heterogeneity analysis indicates that this negative impact is more pronounced in state-owned enterprises, firms subject to weaker regulation, and firms in the eastern region. This paper extends research on the economic consequences of environmental policies from traditional regulatory instruments to the level of environmental governance structural reforms, providing micro-level empirical evidence for understanding the relationship between environmental governance reforms and firm efficiency.