Do Environmental Regulations Do More Harm Than Good? Evidence from Competition and Innovation

61 Pages Posted: 14 Jan 2021 Last revised: 13 May 2021

See all articles by Rui Dai

Rui Dai

Wharton Research Data Services (WRDS)

Rui Duan

York University - Schulich School of Business

Lilian Ng

Schulich School of Business, York University; European Corporate Governance Institute (ECGI)

Date Written: December 10, 2020

Abstract

This study examines whether and how competition affects corporate strategic responses to stringent environmental policies. Using the nonattainment status of U.S. counties as a source of exogenous variation in environmental regulation, we find that competition fosters green innovation as firms respond to stricter regulatory policy. Additional analyses using a subsample of firms in counties whose pollutant concentrations are marginally above or below EPA standards for regional air quality and exploiting exogenous variations in product market competition further reinforce our baseline evidence. The results suggest that the cost of relocation is a critical mechanism that compels firms to innovate when responding to tightened environmental policies and heightened competitive pressure. Regulation-induced green innovation helps competitive firms better achieve product differentiation and attract more corporate customers than their less competitive peers. Finally, competitive firms' strategic responses to stringent environmental regulations result in improved market share growth, markup, profit margin, and abnormal return.

Keywords: Corporate Environmental Policy, Product Market Competition, Green Innovation, Economic Consequences

JEL Classification: G38, M14, Q52, Q53, Q55

Suggested Citation

Dai, Rui and Duan, Rui and Ng, Lilian, Do Environmental Regulations Do More Harm Than Good? Evidence from Competition and Innovation (December 10, 2020). European Corporate Governance Institute – Finance Working Paper No. 725/2021, Available at SSRN: https://ssrn.com/abstract=3746138 or http://dx.doi.org/10.2139/ssrn.3746138

Rui Dai (Contact Author)

Wharton Research Data Services (WRDS) ( email )

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Rui Duan

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Lilian Ng

Schulich School of Business, York University ( email )

N223, Seymour Schulich Building
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Toronto, Ontario ON M3J 1P3
Canada
+1.416.736.2100 x77994 (Phone)

European Corporate Governance Institute (ECGI) ( email )

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1000 Brussels
Belgium

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