Environmental Protection tax and diversified transition of heavily polluting enterprises: Evidence from a quasi-natural experiment in China

Abstract

A comprehensive evaluation of the impact of green taxes on enterprises contributes to expediting the economic transition towards environmental sustainability. This study explores the effect of environmental protection tax (EPT) on corporate diversification by leveraging the quasi-natural experiment of EPT law implementation in China. Empirical evidence reveals that, compared to non-heavily polluting enterprises, EPT increases the level of diversification of heavily polluting enterprises by affecting corporate profitability, debt capacity, and risk. Moreover, this facilitative influence is notably pronounced among non-state-owned enterprises (non-SOEs) and enterprises operating within intensely competitive environments. Further analysis shows that diversification helps heavily polluting enterprises shift to green. This transition has benefits for companies in terms of environmental penalties and operational flexibility, which improves firm viability. From the perspective of corporate diversification, this research enhances our understanding of the influence of green taxes, thus providing empirical evidence for evaluating the effectiveness of EPT.