Do environmental regulations affect firm financial distress in China? Evidence from stock markets

ABSTRACT

This study explores how environmental regulations affected firm financial distress in China from 1999 to 2018, when the national strategy experienced a major adjustment from economic development only to sustainable growth. Instead of targeting specific environmental policy, we divide environmental regulations for firms into two major types, including energy conservation and pollution reduction, and discuss the influences of the overall levels of Chinese environmental regulations in the last two decades. We find that these regulations were negatively associated with firm performance, positively related to the possibility of financial distress, and negatively associated with the length of distress time. Our additional tests also show that the two types of environmental regulations had different influences on firm financial distress for various firm characteristics, including state ownership and industries. The empirical results remain robust when alternative measures of financial distress and potential endogenous issues are controlled.

KEYWORDS:

• Environmental regulations
• firm performance
• financial distress
• stock markets

JEL CLASSIFICATION:

• G33
• G38
• Q58

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

There are three data sources used in this study: a) the data on pollution reduction regulations are available at the China statistical yearbooks and environmental statistical yearbooks; b) the data on measuring energy conservation regulations are available at government websites, including the National Bureau of Statistics (http://www.stats.gov.cn/) and the Ministry of Ecology and Environment (https://www.mee.gov.cn/); c) the financial data are available at the China Stock Market and Accounting Research database.

Supplementary material

Supplemental data for this article can be accessed here

Notes

1 See, for example, Porter and van der Linde Porter and van der Linde (1995a, 1995b), Fisher-Vanden and Thorburn (2011), Testa, Iraldo, and Frey (2011), Zhao et al. (2018), and Huang and Liu (2019).

2 See, for example, Porter and van der Linde (1995a, 1995b), Fisher-Vanden and Thorburn (2011), Zhao et al. (2018), and Huang and Liu (2019).

3 The Ministry of Environmental Protection was replaced by the Ministry of Ecology and Environment in 2018.

4 Appendix A only lists the environmental protection laws for brevity purpose.

5 In this study, we divide environmental regulations for firms into two types, including energy conservation and pollution reduction. Thus, two related factors are adopted to quantify the influence of these two types of environmental regulations, including Green tax (measure pollution reduction) and Unit Energy Consumption (UEC, measure energy conservation). According to Ben Kheder and Zugravu (2008) and Wen and Dai (2020), higher Green tax and UEC values represent more stringent environmental regulations. For the details of these two factors, please refers to Section 3.3.2.

6 http://www.stats.gov.cn/.

7 https://www.mee.gov.cn/.

8 For the details of the EM Z-score model and ICR, please refers to the Supplementary Material. The number of firms falling into financial distress using alternative measures are reported in the Supplementary Material Table S1.

9 To some extent, UEC also controls the impacts of macroeconomic conditions.

10 The environment-related data are only available at provincial level rather than firm level. We first collect the data on firms’ locations and then value the variables of Green tax and UEC based on their locations.

11 See, for example, Fich and Slezak (2008), Kallunki and Pyykko (2013), Fan, Huang, and Zhu (2013) and Miglani, Ahmed, and Henry (2015).

12 See, for example, Opler and Titman (1994) and Caves (1998).

13 The correlations between our main variables are reported in the Supplementary Material Table S2.

14 We also examine the different impacts of environmental regulations on firm performance with these two sub-samples. The results are reported in the Supplementary Material Table S3.

15 We also explore the impacts of environmental regulations on firm performance with these three main sectors. The results are reported in the Supplementary Material Table S4.

Additional information

Funding

This work was supported by the National Social Science Fund of China [grant number 19CJY022].