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ABSTRACT
This study examines the influence of China Environmental Protection Tax (EPT) Law on firm performance, which is proxied by stock prices. Using the event study methodology, we find that most sectors experience negative market reactions, indicating that the EPT Law will increase environmental costs and hurt firm performance. Firms’ political connections and fundamentals are related to the market reactions. The different impacts of political connections on market reactions have been detected between the two events related to the EPT Law. Our results are robust to diverse fixed effects and potential endogeneity issues.
Acknowledgements
This work was supported by the National Social Science Fund of China (18CJY005).
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1 The details of EPT Law refer to Wu and Tal (Citation2018).
2 In addition, we adopt the Buy-and-Hold Model to estimate the long-term impacts and observe similar results.
3 The event windows include (−3, +3), (−5, +5) and (−7, +7). The empirical results are similar to the above event windows. For brevity purposes, we only report the empirical results of CAR (−3, +3).
4 We adopt PC and State Ownership to measure the political connections as firm may establish a connection with government through either politically connected CEO/Chair of Board or state ownership involvement.
5 Government official includes Chinese government, China Communist Party Committee, Central Military Commission, Chinese People’s Political Consultative Conference (CPPCC) and National People’s Congress.
6 Instead of ‘debt to total assets’ ratio, we adopt DtM to measure firm leverage as the former has multicollinearity issue with Size.