Environmental protection tax policy and corporate risk-taking: Evidence from China

Abstract

The fight against pollution problems has sparked a myriad of Environmental Protection Tax (EPT) policies by governments across the globe. However, it remains unclear whether and how EPT affects the level of corporate risk-taking. To narrow the gap, this research selects the EPT policy implemented in 2018 as a quasi-natural experiment to test the effect of EPT on the level of corporate risk-taking by using the sample of Chinese listed firms from 2014 to 2022. The result finds that EPT could dampen the level of corporate risk-taking. Mechanism analysis shows that, the increased market attention, elevated financing costs, and raised investment in end-of-pipe pollution control are the mechanisms by which EPT reduces the level of corporate risk-taking. The “market pressure hypothesis” and “resource dependence hypothesis” of corporate risk-taking can help us better understand these three paths. Moreover, the heterogeneity analysis reveals that the disincentive effect is more pronounced in small enterprises, and those with high financing constraints and low institutional investor ownership. Meanwhile, the disincentive effect is also more pronounced for enterprises located in regions with underdeveloped digital financial inclusion and strong law enforcement. Overall, our findings contribute to a more comprehensive understanding of the impact of EPT on corporate risk-taking at the micro level and provide valuable insights for targeted policy enhancements.