Research On The Effect Of Environmental Regulation Based On Market Response And Corporate Behavio

After the 18th National Congress of the Communist Party of China(CPC),China issued a series of environmental policies and strengthened environmental information disclosure.Traditional environmental regulation instruments mainly include direct legal control by the government and market-based instruments,while environmental information disclosure policies have gradually become an important supplementary instrument of environmental regulation in recent years.Accordingly,this paper defines environmental regulation as environmental violation punishments,including environmental verification failure,fines,environmental credit rating,production suspension and restriction,deadline for rectification and other punitive measures.This paper intends to systematically analyze the effect of environmental regulation in China from the financial market approach.From the information on environmental violation punishments announced by environmental protection departments,it seems that the number of environmental violation punishments for listed companies increased sharply within two years after the revision of the Environmental Protection Law in April 2014.Later,with the promulgation of various environmental policies,such as “Building a Green Financial System”,which came into effect in August 2016.The punishments for environmental violations have been further enhanced and the number of punishments for environmental violations by listed companies has gradually decreased.This indicates that corporate behavior is gradually becoming compliant under strict environmental regulations.In recent years,investors’ attention to environmental risk has increased and investors are placing a high priority on corporate ESG risk.According to the 2021 Global Institutional Investor Survey report published by MSCI(Morgan Stanley Capital International).77% of the 200 institutional asset owners have increased their ESG investments.Of these,up to 90% have increased their ESG investments for large institutional investors with more than $20 billion in assets.With investors highly concerned about corporate ESG risk,environmental regulations will undoubtedly increase corporate stock market restrictions.This leads to our first research question.As investors’ concern about corporate environmental risk increases,do environmental violation punishments affect corporate stock market responses? That is,is the stock market pathway for environmental pollution control effective?Under the call of the 2012 Green Credit Guidelines,financial institutions should fully consider the environmental risks of enterprises when granting credit.The Green Credit Guidelines state that banking financial institutions should effectively identify,detect and control corporate environmental and social risks in credit operations when extending credit.And the results of the environmental risk assessment of enterprises as one of the criteria for credit access.This leads to our second research question.As the Green Credit Guidelines policy increases the consideration of corporate environmental and social risks by banking financial institutions,will environmental violation punishments increase credit constraints and financing costs of violating enterprises?That is,is the credit market approach to environmental pollution control effective?How do enterprises perform under strict environmental regulation policies? In reality,it seems that under environmental regulations,enterprises choose to continuously improve their pollution control capabilities and technological processes.For example,Ningbo Donglian Seals Co.,Ltd.invested 400,000 yuan in sewage upgrading and eventually achieved zero discharge of production wastewater.The company’s president said that the upgrade of sewage equipment not only improved the technology process,but also enhanced the economic efficiency of the enterprise.This leads us to our third research question.Under strict environmental regulation,do enterprises become compliant? How do companies perform under environmental pollution control?The above research questions are key to testing the effectiveness of environmental violation punishments from the financial market approach.A systematic study of the effects of environmental regulation is conducive to further regulating the green financial market and promoting its sustainable development.This paper will systematically study the effect of environmental regulation from the perspective of market response and corporate behavior,and propose targeted policy recommendations.First,this paper discusses the stock market reaction under environmental regulation and examines the stock market pathway for environmental pollution control.There are few studies on stock market reactions under environmental violation punishments,and the existing literature mainly focuses on studies of foreign environmental accidents,or case study research.Based on this,we empirically examine the stock market response to environmental regulation by collecting and collating information on environmental violation punishments disclosed by the Institute of Public & Environmental Affairs,using the event study method approach.We found that:after the disclosure of corporate environmental violation punishment information,the CAR and BHAR of the violating companies decreased,verifying the effectiveness of environmental information disclosure.Further analysis reveals that the increase in corporate fines is an important reason for the effectiveness of environmental information disclosure.The nature of corporate property rights and the nature of industry have a weaker impact on the effectiveness of environmental information disclosure.The research verifies the stock market pathway of environmental pollution control and validates the stock market effectiveness of environmental regulation from the perspective of environmental violation punishments.Second,this paper examines the credit market response under environmental regulation.Under the Green Credit Guidelines policy,how to promote the flow of credit from environmentally risky to environmentally friendly enterprises are an urgent issue for banking financial institutions to address.According to the data of all listed companies in China between 2013 and 2020 and the data of environmental violation punishments published by the Institute of Public & Environmental Affairs,this paper investigates the credit market response to environmental regulation using a difference in difference estimation method.The study finds that the size of credit financing received by violating firms decreases after environmental violation punishments.From the perspective of firm heterogeneity,the effect is more significant in the sample of state-owned enterprises and firms with higher information transparency.From the perspective of regional heterogeneity,the effect is more pronounced in regions with higher marketization and bank competition.From the perspective of industry heterogeneity,the size of interest-bearing financing of violating firms significantly decreases after corporate environmental violation punishments in both polluting and non-polluting industries;in contrast,only the size of long-term debt financing of firms in polluting industries significantly decreases after corporate environmental violation punishments.Further,with the addition of other environmental policies,banking financial institutions gradually increase their examination of corporate environmental risks in credit granting.Thus,we find that the financing constraint effect of environmental violation punishments on non-compliant firms will further increase under the policy boost.We also find that environmental violation punishments can enhance the environmental treatment effect of violating enterprises and increase the environmental treatment investment of violating enterprises.The study in this paper validates the credit market pathway for environmental pollution treatment and verifies the credit market effectiveness of environmental regulation from the perspective of environmental violation punishments.Finally,this paper examines the compliance behavior of firms under environmental regulation.The behavior of enterprises under environmental regulation mainly includes innovation and R&D and environmental protection investment,etc.Most of the existing literature focuses on the innovation and corporate R&D behavior under environmental regulation.As for the corporate environmental investment behavior under environmental regulation,most of the existing literature focuses on the environmental management inputs and pollutant emissions of enterprises,and there is less research on the pollution transfer behavior of enterprises.Accordingly,this paper studies the pollution transfer behavior of firms under environmental violation punishments from the perspective of outward direct investment.We find that firms become more compliant under strict environmental regulations,i.e.,there is no overseas pollution transfer by firms under environmental regulations.Under environmental regulation,firms choose to enhance their corporate social responsibility and green innovation to improve their core competitiveness.Instead,they choose to move their plants to overseas markets,eliminating the “pollution refuge” effect of environmental regulations.Specifically,this paper is the first to examine the impact of environmental regulations on corporate outbound direct investment based on data on environmental violations punishments published by the Institute of Public &Environmental Affairs and unique corporate outbound direct investment data.The study finds that the higher the number of corporate environmental violation punishments and the larger the amount of punishment,the smaller the scale of corporate OFDI.The increase of corporate green innovation and corporate social responsibility under environmental regulation will further crowd out corporate OFDI.Environmental violation punishments have inhibitory effects on both greenfield investment and crossborder M&A in corporate outward investment,and the inhibitory effect is stronger for greenfield investment.The results of this paper suggest that although environmental regulations will have a negative impact on firms going abroad in the short run.However,in the long run,the green innovation and socially responsible investment brought by environmental regulations will enable enterprises to gain more competitive advantages in the international market and have a positive impact on enterprises going abroad.The research in this paper verifies the corporate compliance behavior of environmental pollution management,and adds to the literature on pollution transfer under environmental regulation,as well as the literature on outbound direct investment.Overall,this paper systematically analyzes the effects of environmental regulation from the perspective of environmental violation punishments and validates the financial market pathway of environmental pollution treatment.In terms of the stock market response to environmental regulation,we provide empirical evidence on the effectiveness of environmental information disclosure and finds that the increase in fines is its potential influence mechanism,validating the stock market approach to environmental pollution treatment.In terms of the credit market response to environmental regulation,this paper provides empirical evidence that environmental regulation affects firms’ financing constraints and finds that increased environmental risk is its potential influence mechanism,validating the credit market approach to environmental pollution treatment.On the corporate behavior of environmental regulation,this paper provides empirical evidence that environmental regulation affects corporate OFDI and finds that although environmental regulation hurts the scale of corporate OFDI in the short run,the increase in the level of corporate innovation and social responsibility under environmental regulation is conducive to the establishment of corporate long-term development advantages.Our results suggest that in environmental pollution control,it is necessary to strengthen not only the fines for environmental violations,but also the credit punishments for environmental violations.The two-pronged approach promotes the green and sustainable development of enterprises.