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How does command-and-control environmental regulation impact firm value? A study based on ESG perspective

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Abstract

The question of whether businesses can balance their "pursuit of profit" with their "benefit to society" is still up for dispute. This study examines, employing China's "Central Ecological Environment Protection Inspectorate" policy as a quasi-natural experiment, the little studied but significant relationship between command-and-control environmental regulation and firm value. According to the study, environmental regulations have a long-lasting and gradual positive impact on company value, particularly for businesses that pollute excessively. This is primarily because environmental rules enhance a company's performance in terms of environmental, social, and governance aspects; additionally, the benefits are amplified by internal controls and analyst attention. Subsequent investigation revealed that command and control environmental regulations boost a company's worth when it is situated in a location with better government relations, less dependency on natural resources, and stronger enforcement. The analysis concludes that there is no conflict between the "pursuit of profit" and the "benefit to society" under command-and-control environmental management. Therefore, governments should advise and support businesses in the areas of the environment, society, and governance; enhance the quality of information disclosed; create differentiated enforcement standards to ensure equity in the costs of environmental regulatory compliance for businesses; and create more inclusive and flexible environmental regulatory policies to enhance the business environment for businesses.

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Data availability

The data are public and come from the following sources: Internal control quality data come from DIB Business Risk Management Inc. in China (DIB), central environmental protection inspector comes from Ministry of Ecology and Environment and official websites of provincial governments, ESG data come from the Sino-Securities ESG index, and other data come from China Stock Market & Accounting Research Database(CSMAR).

Notes

  1. Greenpeace and AirVisual release World Air Quality 2018.

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Authors and Affiliations

  1. School of Economics and Management, Fujian Agriculture and Forestry University, Fuzhou, China

    Xianna Hong, Manxiu Ning, Qiuhua Chen & Nan Wang

  2. Ecological Civilization Research Center, Fujian Social Sciences Research Base, Fuzhou, China

    Qiuhua Chen

  3. University of Leicester School of Business, Leicester, England

    Chenyong Shi

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  1. Xianna Hong
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Appendices

Appendix A: Parallel trend analysis

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Table 6 Regression of parallel trend
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6 and Figs. 

Fig. 1
figure 1

ROA parallel trend analysis

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Fig. 2
figure 2

Tobin parallel trend analysis

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2.

Appendix B: Additional Robustness checks

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Table 7 Results of staggered DID
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Table 8 Bacon decomposition
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Table 9 Robust bias correction for staggered DID
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Table 10 The distribution of variables before and after PSM
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Table 11 Robustness test result based on PSM-DID
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Table 12 Robustness test result based on Lag policy time of one period
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Table 13 Robustness test result based on excluding other environmental regulations
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13 and Figs. 

Fig. 3
figure 3

The Bacon decomposition graph for ROA

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Fig. 4
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The Bacon decomposition graph for Tobin

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Fig. 5
figure 5

Placebo: ROA coefficient

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Fig. 6
figure 6

Placebo: Tobin coefficient

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6.

Appendix C: Results of heterogeneity analysis

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Table 14 Results of heterogeneity regression analysis
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14.

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Hong, X., Ning, M., Chen, Q. et al. How does command-and-control environmental regulation impact firm value? A study based on ESG perspective. Environ Dev Sustain (2024). https://doi.org/10.1007/s10668-023-04366-8

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