Property Rights Protection, Environmental Regulation and Corporate Financial Performance: Revisiting the Porter Hypothesis

Abstract

To study the applicability of the Porter hypothesis to Chinese manufacturing enterprises from a property rights perspective, we match the financial data of all A-share manufacturing companies listed in Shanghai and Shenzhen Stock Exchanges of China from 2008 to 2016 with the marketization index compiled by Wang et al. (2017), and test the empirical relationship between environmental regulation and corporate financial performance using a fixed effect model. We find that: First, the Porter hypothesis per se is not supported in China’s manufacturing sector, and environmental regulation often lowers manufacturing enterprises’ financial performance. Second, property rights protection has a positive impact on corporate financial performance, and a good property rights institutional environment can mitigate the negative impact of environmental regulation on corporate financial performance by inducing corporate innovations. Third, property rights protection exhibits differential extent of its moderating effect on the relationship between environmental regulation and enterprise performance across different types of enterprises in terms of their ownership natures and the regional economic development level of their geographic locations. All of our main results survive several robustness checks that we performed. We confirm that Porter hypothesis in general is not applicable for China’s manufacturing enterprises at present, but the moderating effect of property rights protection is steering the relationship between environmental regulations and corporate financial performance towards the path of Porter hypothesis, thereby in the future a win-win situation of environmental protection and corporate financial performance improvement may be achieved.