Environmental Regulation, State Ownership, and Corporate Green Investment: Evidence from China’s 2015 Environmental Protection Law Revisions

Abstract

Exploiting changes in China’s Environmental Protection Law in 2015 as a plausibly exogenous shock to the stringency of pollution control, we evaluate the role that state ownership plays in improving environmental quality. Using a difference-in-differences methodology, we find a significant increase in pollution abatement investments made by state-owned-enterprises (SOEs) from the pre-revision period to the post-revision period, relative to those made by non-SOEs during the same timeframe. In analyzing four potential mechanisms, we find that the positive impact of state ownership on green investment is not driven by: (i) the environment-related government subsidies granted to SOEs; (ii) the effects of political promotion incentives of SOEs’ top management; and (iii) administrative intervention by their sponsoring government. Rather, our analysis suggests that SOEs undertake greater green investments due to their greater concern for local social welfare, as evidenced by the fact that SOEs that make larger amounts of charitable donations and those sponsored by local governments (as opposed to the central government) make greater green investments. Consistent with this, we also show that regions where SOEs have a greater economic influence improved their air quality to a greater extent after 2015 than regions where non-SEOs are more influential. Collectively, our results shed significant light on the importance of state ownership to firms’ responses to environmental regulation.

Keywords: private versus public ownership; green investment; environmental regulation; market valuation; air quality

JEL Classification: D25, G18, H75, R11