Does the Establishment of the Ministry of Environmental Protection Matter for Addressing China's Pollution Problems? Empirical Evidence from Listed Companies

Abstract

This paper uses an event study methodology to examine the stock price reactions of polluting companies traded on stock exchanges in mainland China to an exogenous environmental event, i.e., the establishment of the Ministry of Environmental Protection in 2008, which showed the Chinese government’s ambition to enforce the environmental protection rules more strictly. We find that, on average, these listed companies experienced a statistically and economically significant abnormal return of -3.6% on the event date, indicating that these companies are expected to face a harsher regulatory environment as a result of this administrative reform. The market apparently has placed great expectations on the administrative reform to address China’s environmental pollution problems. In addition, we find that, compared to their counterparts in private sector, state-owned enterprises (SOEs) experienced a smaller price decline during the event window, which suggests that SOEs are more likely to enjoy favorable treatment from regulatory agencies. Our empirical evidence therefore shows that the selective enforcement of environmental law is a significant concern and tends to undermine the effects of such reform.

Keywords: Administrative Ranks, Event Study, Listed Companies, Ministry of Environmental Protection of China, Polluting Industries

JEL Classification: G14, K32, Q58