Environmental regulation, market forces, and corporate environmental responsibility: Evidence from the implementation of cleaner production standards in China

Abstract

China, the world’s largest emerging economy, has been under enormous pressure to combat environmental challenges. In response, the Chinese government has implemented a series of cleaner production standards (CPSs) to address pollution issues. Taking advantage of the staggered passage of 56 CPSs during the period 2003–2010, this study uses a difference-in-differences research design to investigate how environmental regulation drives corporate environmental responsibility. The results show that, following the passage of a CPS, firms in regulated industries exhibit a significant improvement in both green investment and green innovation, indicators of corporate environmental responsibility. Moreover, the effect of CPSs is strengthened by pressure from key stakeholders – institutional shareholders and large customers, and also by two market conditions, namely product market competition and financial market development. The findings have important policy implications and suggest that coercive regulatory forces and market forces can reinforce each other to improve the effectiveness of environmental regulations.