The performance of companies under environmental regulation stress: a perspective from idiosyncratic risk

Abstract

Using the data of 3319 Chinese listed companies from 2007 to 2019, this study examines how companies performed under the stress of regional environmental regulations. We discover that increased regional environmental regulation intensity efficiently lowers companies’ idiosyncratic risk with empirical process. This result proves that environmental regulation pressure could bring unexpected benefits to business situation of companies, which is reconfirmed through several robustness tests. The mechanism analysis further demonstrates that internal governance, rather than managerial shortsightedness and added environmental investment, strengthens the benefits, among internal factors. Moreover, this relationship is more noticeable for non-energy and non-state-owned firms, while linkages with bank or government are found to be ineffective on this issue. The R&D investment of local companies above designated size performs better than other two external factors (regional legal governance, investment on technology and education). Our study verifies an unattended role of environmental regulation on the companies’ idiosyncratic risk, revealing that the environmental initiatives of regional governments do not always adversely affect local companies. Our study could facilitate the strategic arrangements of policymakers, businesses, investors, and other stakeholders

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