Does environmental regulation promote enterprise profitability? Evidence from the implementation of China's newly revised Environmental Protection Law

Abstract

The existing test of the “strong” version of the Porter hypothesis (PH) presents mixed results. Relevant literature explains this phenomenon from the perspective of the “weak” version of the PH. It is unclear whether other explanations exist. China's listed company data from 2010 to 2018 were used, and the Propensity Score Matching-Difference-in-Differences method was used to investigate the influence of a newly revised Environmental Protection Law (new EPL) on companies' profitability and the underlying mechanism. The results shows that the enactment of the new EPL has significantly improved the profitability of heavily polluting companies, which is realized through the consolidation of enterprises' cost management and elimination of small firms with high compliance costs. However, the new EPL has not effectively stimulated the innovation of enterprises, which shows that the weak PH does not hold. This finding helps develop a new method for understanding the mechanism behind the strong PH.