How China “Going green” impacts corporate performance?

Abstract

The terminology “Sustainability” refers to the practice of integrated principles from environmentalism, social responsibility, and economic development that promote endurance. The question how to maintain a sustainable developing mode concerns many developed and developing countries, whilst the rapid growth of environmental regulations geared toward sustainability summons the doubt of how such policies impact firm productivity and efficiency. In this study, we used a natural experiment methodology to explore the relationship between environmental regulation policy and economic outcomes based on China, where much attention on environmental issues have been putting. A difference-in-difference-in-differences (DDD) model was adopted in our research to solve the endogeneity problem. We root our exploration in the environmental policies of China’s Eleventh Five-Year Plan and consider the different levels of pollution across industries. Employing a large dynamic panel dataset of the Above-scale Industrial Dataset from the period between 1998 and 2012 with roughly 3,000,000 observations, we calculate a number of indicators of corporate performance, including Total Factor Productivity (TFP) and Return on Assets (ROA). Moreover, the Eleventh Five-Year Plan’s lasting economic effects are also investigated. The results evidence that China’s environmental regulation policies negatively affect corporate TFP and ROA in the short-term. Moreover, significant lagged effects can be seen, and the evidence shows that other aspects of economic performance are also negatively associated with environmental regulation policies. Furthermore, we find that light financial constraints, long-term investment behaviors, and capital-labor structures play important roles in bolstering the performance of firms in high-polluting industries. Notably, we find that among these high-polluting firms, poorly performing firms are more likely to exit from the market. On a positive aspect, we find a significant reduction of TFP’s misallocation, particularly in terms of long-term work efficiency. Our findings demonstrate that environmental regulations can help markets that cannot balance economic growth and the pollution caused by economic growth overcome failure; well-designed policy can thus help the economy grow sustainably.