How Top-Down Water Regulation Affects the Financial Performance of Enterprises: The River Chief System in China as an Example

As a top-down type of water regulation, the River Chief System (RCS) in China has effectively enhanced urban water quality. Simultaneously, environmental control significantly impacts the financial performance of enterprises. In recent years, the tension between environmental protection and economic development has escalated, underscoring the undeniable economic ramifications of stringent water regulations. Enterprises are the fundamental agents of economic activities and environmental impact, thus becoming the primary targets of water environment regulatory policies. This study adopts the differences-in-differences (DID) method and uses a sample of listed enterprises in the Yangtze River Economic Belt region from 2010 to 2021 to study the impact of the RCS on the financial performance of enterprises. The results show that the RCS harms the financial performance of enterprises. This impact primarily manifests through increased environmental protection investments. Conversely, the RCS does not have a positive influence on enterprises’ technological innovation. This indicates the challenge of stringent top-down environmental regulations in stimulating short-term technological advancements and enhancing enterprise performance. Moreover, the adverse effects of the RCS on financial performance are notably pronounced for non-state-owned enterprises and those located in the upper Yangtze River Economic Belt. This suggests that private enterprises and those in less-developed regions exhibit lower resilience to top-down environmental regulations.