Abstract
In 2016, the issue of the Environmental Protection Tax Law indicated the enhancement of environmental protection in China. This study examines the market reaction to firms in heavy-polluting industries, and the effects of external legal institutional quality and internal environmental disclosure on firm value around the passage of Environmental Protection Tax Law. Using an event study approach coupled with ordinary least square regressions, the researchers find a significantly negative market reaction to firms in heavy-polluting industries, but this negative reaction varies depending on the expected increase in future regulatory costs. Specifically, the above negative reaction is stronger when the firm reveals that itself or its subsidiary belongs to heavy-polluting industry, however it would be mitigated when a firm is in a region with better quality of legal institutions or discloses environmental improvement activities. Overall, the results are consistent with the market perceiving that the environmental protection tax law enacted would increase regulatory costs for firms in heavy-polluting industries, and also show the higher-quality regional legal institutions and more efforts on environmental protection could relieve the market’s pessimism caused by uncertainty.
Highlights
Public and government attention to the environment are increasing along with the surge in pollution levels in China since 2013 [1,2]
The market reaction to the passage of Environmental Protection Tax Law is negative for firms in heavy-polluting industries
This study examines the value effects from the passage of the Environmental Protection Tax Law on heavy-polluting firms as well as firm- and regional-level influential factors in the aspect of expected future regulatory costs
Summary
Public and government attention to the environment are increasing along with the surge in pollution levels in China since 2013 [1,2]. The authors argue that the stock market would respond more negatively to firms in heavy-polluting industries since the investors perceive the increase of regulatory costs heavy-polluting firms faced after the shift from pollutant discharge fees to environmental taxes In line with this argument, based on heavy-polluting firms, the authors further argue that the market’s perception for the expected increase in regulatory costs would vary depending on regional legal institutions and whether firms embrace environmental information disclosure. The negative market reaction was stronger when the firm admitted that itself or its subsidiary belonged to heavy-polluting industry It could be mitigated by higher-quality regional legal institutions or the disclosure of environmental improvement activities by a narrative language. In the aspect of regulatory costs, this study enriches the research on how macro-level policies influence firm value through examining the market reaction to the passage of the Environmental Protection Tax Law. Third, our research enhances the understanding of the role of environmental information disclosure on firm value.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
