IDEAS home Printed from https://ideas.repec.org/a/spr/endesu/v25y2023i12d10.1007_s10668-022-02699-4.html
   My bibliography  Save this article

The impact of environmental regulation on corporate financial performance: an empirical study from China

Author

Listed:
  • Xiyi Bao

    (Zhejiang Gongshang University)

  • Binbin Yu

    (Zhejiang Gongshang University)

Abstract

By using dynamic game analysis, a theoretical framework is constructed to investigate the impact of environmental regulations on corporate financial performance. A sample of 3021 A-share listed companies, listed on the Shanghai and Shenzhen stock exchanges from 2010 to 2018, is used for empirical testing with GMM model. Through the matching of regional data and enterprise data, this paper expands the measurement of environmental regulation from meso to micro and then, systematically estimates the impact and mediating effect of environmental regulation on corporate financial performance. The results show that environmental regulation policies and instruments are important factors influencing corporate financial performance and that the main way to improve the efficiency of environmental regulation is to encourage firms to carry out pollution control through technological innovation. The empirical results not only show that environmental regulations can facilitate the upgrading of corporate financial performance, but also that technological innovation, especially green technology innovation, also partially mediates the effect of environmental regulations in promoting corporate financial performance. At the same time, the impact of environmental regulations on corporate financial performance is both constrained and influenced by corporate ownership, industry classification and city level. Environmental regulations are more likely to improve the corporate financial performance of non-state-owned companies than that of state-owned companies. Environmental regulation significantly boosts corporate financial performance in clean industries, but significantly depresses corporate financial performance in polluting industries. Compared with higher-level cities, environmental regulations only facilitate improvements to corporate financial performance in ordinary prefecture-level cities.

Suggested Citation

  • Xiyi Bao & Binbin Yu, 2023. "The impact of environmental regulation on corporate financial performance: an empirical study from China," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 25(12), pages 15003-15023, December.
    • Handle: RePEc:spr:endesu:v:25:y:2023:i:12:d:10.1007_s10668-022-02699-4
    DOI: 10.1007/s10668-022-02699-4
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10668-022-02699-4
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10668-022-02699-4?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Nguyen, Thi Hong Hanh & Ntim, Collins G. & Malagila, John K., 2020. "Women on corporate boards and corporate financial and non-financial performance: A systematic literature review and future research agenda," International Review of Financial Analysis, Elsevier, vol. 71(C).
    2. DeCanio, Stephen J. & Fremstad, Anders, 2013. "Game theory and climate diplomacy," Ecological Economics, Elsevier, vol. 85(C), pages 177-187.
    3. Zhonghua Cheng & Lianshui Li & Jun Liu, 2018. "The spatial correlation and interaction between environmental regulation and foreign direct investment," Journal of Regulatory Economics, Springer, vol. 54(2), pages 124-146, October.
    4. Rubashkina, Yana & Galeotti, Marzio & Verdolini, Elena, 2015. "Environmental regulation and competitiveness: Empirical evidence on the Porter Hypothesis from European manufacturing sectors," Energy Policy, Elsevier, vol. 83(C), pages 288-300.
    5. Riccardi, R. & Bonenti, F. & Allevi, E. & Avanzi, C. & Gnudi, A., 2015. "The steel industry: A mathematical model under environmental regulations," European Journal of Operational Research, Elsevier, vol. 242(3), pages 1017-1027.
    6. Fard, Amirhossein & Javadi, Siamak & Kim, Incheol, 2020. "Environmental regulation and the cost of bank loans: International evidence," Journal of Financial Stability, Elsevier, vol. 51(C).
    7. Raphael Calel & Antoine Dechezleprêtre, 2016. "Environmental Policy and Directed Technological Change: Evidence from the European Carbon Market," The Review of Economics and Statistics, MIT Press, vol. 98(1), pages 173-191, March.
    8. Rikard Forslid & Toshihiro Okubo, 2015. "Which Firms Are Left In The Periphery? Spatial Sorting Of Heterogeneous Firms With Scale Economies In Transportation," Journal of Regional Science, Wiley Blackwell, vol. 55(1), pages 51-65, January.
    9. Tan, Kim Hua & Chung, Leanne & Shi, Lei & Chiu, Anthony, 2017. "Reprint "Unpacking the indirect effects and consequences of environmental"," International Journal of Production Economics, Elsevier, vol. 190(C), pages 22-30.
    10. Li, Xinze & Du, Kerui & Ouyang, Xiaoling & Liu, Lili, 2022. "Does more stringent environmental regulation induce firms' innovation? Evidence from the 11th Five-year plan in China," Energy Economics, Elsevier, vol. 112(C).
    11. Curtis, E. Mark & Lee, Jonathan M., 2019. "When do environmental regulations backfire? Onsite industrial electricity generation, energy efficiency and policy instruments," Journal of Environmental Economics and Management, Elsevier, vol. 96(C), pages 174-194.
    12. Tan, Kim Hua & Chung, Leanne & Shi, Lei & Chiu, Anthony, 2017. "Unpacking the indirect effects and consequences of environmental regulation," International Journal of Production Economics, Elsevier, vol. 186(C), pages 46-54.
    13. Xie, Rong-hui & Yuan, Yi-jun & Huang, Jing-jing, 2017. "Different Types of Environmental Regulations and Heterogeneous Influence on “Green” Productivity: Evidence from China," Ecological Economics, Elsevier, vol. 132(C), pages 104-112.
    14. Fang, Hongsheng & Su, Yunqing & Lu, Weijun, 2022. "Tax incentive and corporate financial performance: Evidence from income tax revenue sharing reform in China," Journal of Asian Economics, Elsevier, vol. 81(C).
    15. Galinato, Gregmar I. & Chouinard, Hayley H., 2018. "Strategic interaction and institutional quality determinants of environmental regulations," Resource and Energy Economics, Elsevier, vol. 53(C), pages 114-132.
    16. Antoci, Angelo & Borghesi, Simone & Russu, Paolo, 2012. "Environmental protection mechanisms and technological dynamics," Economic Modelling, Elsevier, vol. 29(3), pages 840-847.
    17. Cheng, Hua & Ma, Yuanyuan & Qi, Shusen & Xu, Lixin Colin, 2021. "Enforcing government policies: The role of state-owned enterprise in China’s one child policy," World Development, Elsevier, vol. 146(C).
    18. Long, Xingle & Chen, Yaqiong & Du, Jianguo & Oh, Keunyeob & Han, Insoo, 2017. "Environmental innovation and its impact on economic and environmental performance: Evidence from Korean-owned firms in China," Energy Policy, Elsevier, vol. 107(C), pages 131-137.
    19. Du, Jialin & Bai, Tao & Chen, Stephen, 2019. "Integrating corporate social and corporate political strategies: Performance implications and institutional contingencies in China," Journal of Business Research, Elsevier, vol. 98(C), pages 299-316.
    20. Yang, Qiuyue & Song, Deyong, 2019. "How does environmental regulation break the resource curse: Theoretical and empirical study on China," Resources Policy, Elsevier, vol. 64(C).
    21. Chen, Shimin & Sun, Zheng & Tang, Song & Wu, Donghui, 2011. "Government intervention and investment efficiency: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 17(2), pages 259-271, April.
    22. Emilio Abad-Segura & Ana Batlles-delaFuente & Mariana-Daniela González-Zamar & Luis Jesús Belmonte-Ureña, 2021. "Implications for Sustainability of the Joint Application of Bioeconomy and Circular Economy: A Worldwide Trend Study," Sustainability, MDPI, vol. 13(13), pages 1-24, June.
    23. Chen, Chunhua & Jiang, Dequan & Lan, Meng & Li, Weiping & Ye, Ling, 2022. "Does environmental regulation affect labor investment Efficiency?Evidence from a quasi-natural experiment in China," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 82-95.
    24. Wang, Yun & Sun, Xiaohua & Guo, Xu, 2019. "Environmental regulation and green productivity growth: Empirical evidence on the Porter Hypothesis from OECD industrial sectors," Energy Policy, Elsevier, vol. 132(C), pages 611-619.
    25. Maxime C. Cohen & Ruben Lobel & Georgia Perakis, 2016. "The Impact of Demand Uncertainty on Consumer Subsidies for Green Technology Adoption," Management Science, INFORMS, vol. 62(5), pages 1235-1258, May.
    26. Jiang, Zhenyu & Wang, Zongjun & Lan, Xiao, 2021. "How environmental regulations affect corporate innovation? The coupling mechanism of mandatory rules and voluntary management," Technology in Society, Elsevier, vol. 65(C).
    27. Levinson, Arik, 1996. "Environmental regulations and manufacturers' location choices: Evidence from the Census of Manufactures," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 5-29, October.
    28. Chakraborty, Pavel & Chatterjee, Chirantan, 2017. "Does environmental regulation indirectly induce upstream innovation? New evidence from India," Research Policy, Elsevier, vol. 46(5), pages 939-955.
    29. Li, Hai-ling & Zhu, Xue-hong & Chen, Jin-yu & Jiang, Fei-tao, 2019. "Environmental regulations, environmental governance efficiency and the green transformation of China's iron and steel enterprises," Ecological Economics, Elsevier, vol. 165(C), pages 1-1.
    30. Chen, Lujie & Feldmann, Andreas & Tang, Ou, 2015. "The relationship between disclosures of corporate social performance and financial performance: Evidences from GRI reports in manufacturing industry," International Journal of Production Economics, Elsevier, vol. 170(PB), pages 445-456.
    31. Vivian W. Fang & Mark Maffett & Bohui Zhang, 2015. "Foreign Institutional Ownership and the Global Convergence of Financial Reporting Practices," Journal of Accounting Research, Wiley Blackwell, vol. 53(3), pages 593-631, June.
    32. Sun, Yongping & Yang, Ying & Huang, Nan & Zou, Xin, 2020. "The impacts of climate change risks on financial performance of mining industry: Evidence from listed companies in China," Resources Policy, Elsevier, vol. 69(C).
    33. Tang, Pengcheng & Yang, Shuxiang & Yang, Shuwang, 2020. "How to design corporate governance structures to enhance corporate social responsibility in China's mining state-owned enterprises?," Resources Policy, Elsevier, vol. 66(C).
    34. Wang, Ailun & Hu, Shuo & Li, Jianglong, 2021. "Does economic development help achieve the goals of environmental regulation? Evidence from partially linear functional-coefficient model," Energy Economics, Elsevier, vol. 103(C).
    35. Li, Feiyang & Lin, Ziyue & Huang, Liangxiong & Yang, Caiting, 2022. "Environmental regulation and global value chain division position：Analysis based on global transnational data," Energy Policy, Elsevier, vol. 168(C).
    36. Fang, Hongyan & Nofsinger, John R. & Quan, Juan, 2015. "The effects of employee stock option plans on operating performance in Chinese firms," Journal of Banking & Finance, Elsevier, vol. 54(C), pages 141-159.
    37. Bai, Lijuan & Yan, Xiangbin & Yu, Guang, 2019. "Impact of CEO media appearance on corporate performance in social media," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chenhao Gong & Alina Badulescu, 2025. "Management Motivation, Ethical Responsibility or Social Pressure: How Top Managers Improve Green Behaviors Through Behavioral Strategic Control?," Sustainability, MDPI, vol. 17(7), pages 1-30, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zhu, Xuehong & Zuo, Xuguang & Li, Hailing, 2021. "The dual effects of heterogeneous environmental regulation on the technological innovation of Chinese steel enterprises—Based on a high-dimensional fixed effects model," Ecological Economics, Elsevier, vol. 188(C).
    2. Ren, Shenggang & Hu, Yucai & Zheng, Jingjing & Wang, Yangjie, 2020. "Emissions trading and firm innovation: Evidence from a natural experiment in China," Technological Forecasting and Social Change, Elsevier, vol. 155(C).
    3. Tang, Maogang & Li, Xiuzhen & Zhang, Yun & Wu, Yingtao & Wu, Baijun, 2020. "From command-and-control to market-based environmental policies: Optimal transition timing and China’s heterogeneous environmental effectiveness," Economic Modelling, Elsevier, vol. 90(C), pages 1-10.
    4. Song, Wenfei & Han, Xianfeng & Liu, Qiange, 2024. "Patterns of environmental regulation and green innovation in China," Structural Change and Economic Dynamics, Elsevier, vol. 71(C), pages 176-192.
    5. Wang, Zongrun & Fu, Haiqin & Ren, Xiaohang, 2023. "Political connections and corporate carbon emission: New evidence from Chinese industrial firms," Technological Forecasting and Social Change, Elsevier, vol. 188(C).
    6. Fan, Jianshuang & Liu, Dongtao & Zhou, Lin & Ding, Liang & Zhang, Junshen, 2025. "Environmental regulation, resource dependence, and innovation and entrepreneurship vitality of Chinese cites," Resources Policy, Elsevier, vol. 101(C).
    7. Xing Li & Guiyang Zhang & Yong Qi, 2024. "Differentiated environmental regulations and enterprise innovation: the moderating role of government subsidies and executive political experience," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 26(2), pages 3639-3669, February.
    8. Xu Guo & Lin Fu & Xiaohua Sun, 2021. "Can Environmental Regulations Promote Greenhouse Gas Abatement in OECD Countries? Command-and-Control vs. Market-Based Policies," Sustainability, MDPI, vol. 13(12), pages 1-18, June.
    9. Xie, Yu & Wu, Desheng & Li, Xiaoyan & Tian, Suhua, 2023. "How does environmental regulation affect productivity? The role of corporate compliance strategies," Economic Modelling, Elsevier, vol. 126(C).
    10. Liu, Duan & Yu, Nizhou & Wan, Hong, 2022. "Does water rights trading affect corporate investment? The role of resource allocation and risk mitigation channels," Economic Modelling, Elsevier, vol. 117(C).
    11. He, Yiqing & Ding, Xin & Yang, Chuchu, 2021. "Do environmental regulations and financial constraints stimulate corporate technological innovation? Evidence from China," Journal of Asian Economics, Elsevier, vol. 72(C).
    12. Zhang, Yijun & Li, Xiaoping & Song, Yi & Jiang, Feitao, 2021. "Can green industrial policy improve total factor productivity? Firm-level evidence from China," Structural Change and Economic Dynamics, Elsevier, vol. 59(C), pages 51-62.
    13. Yuhan Jing & Mingzhao Hu & Lingdi Zhao, 2023. "The effect of heterogeneous environmental regulations on the employment skill structure: The system-GMM approach and mediation model," PLOS ONE, Public Library of Science, vol. 18(8), pages 1-33, August.
    14. Zhang, Wei & Li, Guoxiang & Guo, Fanyong, 2022. "Does carbon emissions trading promote green technology innovation in China?," Applied Energy, Elsevier, vol. 315(C).
    15. Liu, Jianlei & Uchida, Konari & Bao, Chenyu, 2024. "Environmental regulation, corporate environmental disclosure, and firm performance: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 85(C).
    16. Weijiang Liu & Mingze Du & Yuxin Bai, 2021. "Mechanisms of Environmental Regulation’s Impact on Green Technological Progress—Evidence from China’s Manufacturing Sector," Sustainability, MDPI, vol. 13(4), pages 1-23, February.
    17. Muyao Li & Jinsong Zhang & Ramakrishnan Ramanathan & Ruiqian Li, 2020. "Opening the Black Box: The Impacts of Environmental Regulations on Technological Innovation," IJERPH, MDPI, vol. 17(12), pages 1-18, June.
    18. Zhao, Ziyi & Zhao, Yuhuan & Lv, Xin & Li, Xiaoping & Zheng, Lu & Fan, Shunan & Zuo, Sumin, 2024. "Environmental regulation and green innovation: Does state ownership matter?," Energy Economics, Elsevier, vol. 136(C).
    19. Yanli Li & Jiayuan Li & Luyao Gan, 2022. "A Meta-Analysis of the Relationship between Environmental Regulations and Competitiveness and Conditions for Its Realization," IJERPH, MDPI, vol. 19(13), pages 1-12, June.
    20. Wugan Cai & Peiyun Ye, 2022. "Local-neighborhood effects of different environmental regulations on green innovation: evidence from prefecture level cities of China," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 24(4), pages 4810-4834, April.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:endesu:v:25:y:2023:i:12:d:10.1007_s10668-022-02699-4. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.