Environmental regulations, finance, and firm environmental investments: an empirical exploration

Abstract

Environmental regulations (ERs) drive financial decisions, influencing firms to invest in sustainable practices. Balancing economic goals with eco-friendly initiatives is pivotal in today's business landscape. This study investigates the intricate relationship between ERs, and firms’ environmental investments, focusing on the nuances of command-based and market-based ERs. With the backdrop of China's rapid economic growth and its subsequent environmental challenges, this research aims to shed light on how ERs influence firms’ environmental investments and innovative practices while considering the role of Financial Constraints (FCs). The study empirically examines the interplay of these factors using a comprehensive dataset of listed companies in China. The study utilizes 750 observations from the China Environmental Statistical Yearbook (2019-2020) and investigates the relationship between ER, finance, and firm environmental (FE) investments in diverse Chinese industries and regions. The study utilized diverse statistical methods, baseline, mediating effect, robustness tests, and linear regression to analyze China's environmental data, emphasizing descriptive analysis. The theoretical contribution of this study is that highlighting regulatory pressure fosters financial gains, driving firms to invest in environmental initiatives for long-term profitability proactively. These findings underscore the significance of taking into financial dynamics while creating and implementing ER. Policymakers should focus on mechanisms that enhance firms’ access to funding, such as promoting transparency through environmental and social responsibility reporting.