Environmental regulation and environmental performance of enterprises: Quasi‐natural experiment of the new environmental protection law

Abstract

Whether command‐control environmental regulation can play a positive role in circumstances of imperfect market incentive‐based environmental regulation remains rarely explored. Using the difference‐in‐difference model, we find that command‐control environmental regulation can significantly improve the environmental performance of heavily polluting firms. This result still holds after a sequence of robustness tests. The analysis of the economic mechanism indicates that the new environmental protection law mainly contributes positively to the environmental performance of high‐polluting firms by improving the quality of their environmental investments and pollution treatment disclosures, and by reducing the government subsidies they receive to improve the environmental performance of high‐polluting firms. Meanwhile, the new environmental protection law has a more pronounced impact on heavily polluting enterprises in the eastern region, with imperfect internal control, stronger environmental regulations, more distant political connections, greater pressure on regional GDP growth and weaker industry competition. This paper confirms the effectiveness of the new environmental law in improving environmental performance of heavily polluting enterprises in pursuit of carbon peaking and carbon neutrality goals, and provides new evidence to test the weak Porter hypothesis in the context of transition economies.