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Does environmental regulation promote enterprise profitability? Evidence from the implementation of China's newly revised Environmental Protection Law

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  • Zhou, Di
  • Qiu, Yuan
  • Wang, Mingzhe

Abstract

The existing test of the “strong” version of the Porter hypothesis (PH) presents mixed results. Relevant literature explains this phenomenon from the perspective of the “weak” version of the PH. It is unclear whether other explanations exist. China's listed company data from 2010 to 2018 were used, and the Propensity Score Matching-Difference-in-Differences method was used to investigate the influence of a newly revised Environmental Protection Law (new EPL) on companies' profitability and the underlying mechanism. The results shows that the enactment of the new EPL has significantly improved the profitability of heavily polluting companies, which is realized through the consolidation of enterprises' cost management and elimination of small firms with high compliance costs. However, the new EPL has not effectively stimulated the innovation of enterprises, which shows that the weak PH does not hold. This finding helps develop a new method for understanding the mechanism behind the strong PH.

Suggested Citation

  • Zhou, Di & Qiu, Yuan & Wang, Mingzhe, 2021. "Does environmental regulation promote enterprise profitability? Evidence from the implementation of China's newly revised Environmental Protection Law," Economic Modelling, Elsevier, vol. 102(C).
    • Handle: RePEc:eee:ecmode:v:102:y:2021:i:c:s0264999321001747
    DOI: 10.1016/j.econmod.2021.105585
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    More about this item

    Keywords

    Environmental regulation; Newly revised Environmental Protection Law; Porter hypothesis; Profitability; Heterogeneity of compliance costs;
    All these keywords.

    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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