How Does the Implementation of the New Environmental Protection Law Affect the Stock Price of Heavily Polluting Enterprises? Evidence from China’s Capital Market

ABSTRACT

This paper puts forward “attention hypothesis” and “information revelation hypothesis” in terms of the strong market response to the implementation of the updated China Environmental Protection Law (hereinafter referred to as “the new EPL”) in 2015, which verifies the effectiveness of China’s capital market in identifying dynamic changes of company fundamental information by selecting listed heavily polluting enterprises in China as research samples. The “attention hypothesis” interprets the slump in stock due to investors’ attention attracted by media coverage about implementation of “the new EPL”, while the “information revelation hypothesis” focuses on the investors’ information acquisition during the hiatus from promulgation to implementation of “the new EPL”. This paper is of great significance to help understand the behavioral characteristics, decision-making process and influencing mechanism of investors.

KEY WORDS:

• attention
• environmental protection law
• event study
• information revelation
• market efficiency

Acknowledgments

We thank the editor (Prof. Ali Kutan) of this journal and three anonymous referees for their valuable comments and suggestions.

Notes

1. Since the stock price shock caused by the implementation of “the new EPL” is the focus of this study, the stock price shock promulgated by the law would not be reported in this paper. Interested readers can contact the author for additional information. Because the heavily polluting industry is more strictly regulated by the environment, this paper takes the listed companies as the research object.

2. Article 59 of Chapter VI of the New Environmental Protection Law stipulates that if enterprises, institutions and other producers and operators discharge pollutants illegally, are fined and punished, are ordered to make corrections, and refuse to make corrections, the administrative organ that makes the decision of punishment according to law may make the decision from the next day on the date of ordering corrections. According to the amount of the original punishment, the punishment shall be continued on a daily basis.

3. Article 68 of Chapter VI of the New Environmental Protection Law stipulates that: If the local people’s governments at various levels, the competent environmental protection departments of the people’s governments at or above the county level and other departments responsible for supervision and administration of environmental protection commit any of the following acts, the persons directly in charge and other persons directly responsible shall be given a record, a record of major mistakes or a degraded punishment. If serious consequences occur, the person in charge shall be dismissed or dismissed, and the principal person in charge shall be responsible for resigning basis.

4. The content is the same as footnote 1.

5. According to the latest sample monitoring by http://www.alexa.cn/rank/, an international company that provides authoritative statistics on website traffic in terms of daily average visitors and page views in China, Tencent media, Sohu media and Wasu media rank among the top websites, China’s phoenix nets internet project, China’s Securities Times, China’s Hexun net rank among the top financial and economic websites.

6. According to the statistics of statcounter company, Website: https://statcounter.com/, an American traffic monitoring agency, in 2016, the search market share of Baidu in China was 77.01%, the number of users exceeded 600 million, and the daily search volume was up to 6 billion times. Obviously, it is scientific to use the search times of Baidu to show the attention of investors in China’s stock market.

7. In fact, when we adopt the relevant financial indicators in the first three quarters of 2014, we find that there is no significant change in the empirical conclusions.

Additional information

Funding

The work was supported by Ministry of Finance in China Major Project of Accounting Scientific (project number 2015KJA012) and College Humanities and Social Sciences Base Project of Anhui Province (project number SK2016A072).