Does China’s Environmental Protection Tax Law Effectively Influence Firms? Evidence from Stock Markets

Abstract

This study uses stock market data to examine whether China’s Environmental Protection Tax Law (EPT Law) effectively influences firms’ environmental behavior. Using the event study methodology, we find that the Law generally affects listed firms. Though higher environmental tax rates are negatively associated with the Law’s effectiveness from the investors’ perspective, greater investment in research and development can reduce firms’ emissions and achieve greater compliance with a stringent environmental regime. Sub-sample tests show that the EPT Law has a greater impact on polluting firms than on nonpolluting firms, indicating that this policy effectively targeted polluters.