Does Central Government Environmental Inspection Promote Firm Environmental Protection Expenditure? Evidences from Listed Companies in China
Yang Liuyong1, Zhang Zeye1, Zheng Jianming2
1.School of Economics, Zhejiang University, Hangzhou 310058, China 2.School of Business, University of International Business and Economics, Beijing 100029, China
Abstract：With the rapid growth of the Chinese economy, the problem of environmental deterioration has been increasingly serious. As primary environmental polluters, firms should have borne the responsibility of environmental governance and increased the investment in environmental protection. However, due to the externalities of environmental protection, firms are often reluctant to participate in environmental investment. In order to regulate the firms’ environmental behavior, the Chinese central government has set up a series of polices for environmental protection over the last few years. However, driven by the priority of economic growth, the local government has weaker incentives to implement environmental regulations, and the phenomenon of incomplete implementation by the local government is common, which highlights the importance of supervising the local governments to intensify environmental enforcement.The Central Environmental Inspection (CEI) launched in 2016 is a significant institutional arrangement for the environmental protection in China, which focuses on the local governments’ responsibility for environmental protection. According to the instructions of the CEI, inspection teams established by the central government are dispatched to supervise the local environmental enforcement. The fundamental purposes of the CEI are to improve the quality of the environment and promote the green transformation of the industry. Therefore, it is significant to analyze the impact of the CEI on the firms’ investment in environmental protection. However, most studies on the CEI mainly focus on theoretical discussions and effect evaluation, and there is little evidence about whether and how the CEI influences the firm environmental protection expenditure. Taking the launch of the CEI as a quasi-natural experiment, this paper examines the effect of the CEI on the firms’ investment in environmental protection with the help of a difference-in-differences methodology.The conclusions of this paper are as follows. First, the CEI significantly enhances the firm environmental protection expenditure, and this relationship is robust to the different specifications and alternative measures. Second, the improved level of environmental enforcement is a possible channel, and there is no evidence that governmental subsidy plays a role. Third, heterogeneity analysis shows that the promotion effect of the CEI on the firm environmental investment is particularly pronounced in subsamples with high-revenue firms and state-owned firms (SOEs), and is insignificant in the subsample of non-SOEs with political connections, which suggests that local protectionism has been relieved during the CEI. In addition, firms in monopolized industries or located in key inspection provinces invest more in environmental protection during the CEI. Based on the above conclusions, this paper suggests the government should supervise the local governments’ implementation of environmental regulations and promote the normalization of the CEI. Besides, this study makes several contributions to the extant literature. First, previous studies mainly pay attention to the effect of the CEI on air pollution while ignoring the firms’ environmental behavior. This paper provides causal evidences that the CEI significantly promotes the firm environmental investment, which not only enriches the literature on the determinants of firms’ environmental efforts, but also expands the literature on the environmental consequences of the CEI. Second, with the help of a difference-in-differences method, a difference-in-differences-in-differences method, and a propensity-score-matching method, this paper is able to avoid endogenous problems among variables, and provide a causal relationship between the CEI and the firm environmental protection expenditure. Third, this paper provides implications for the follow-up promotion of the CEI and the formulation of environment policies.
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