Drivers of environmental regulation costs and their perception by firms: Evidence from Slovenia

This study explores the driving forces behind environmental regulation costs and the factors influencing managers' perceptions of these costs. Drawing from a literature review, a theoretical model was constructed to identify factors influencing the size of environmental regulation costs and firms' perceptions thereof. The study uses data from a survey of 198 Slovenian firms subject to environmental regulations. Structural equation modeling (SEM) was applied to test and estimate the causal relationships among the identified factors. The results reveal that environmental regulatory obligations and firm size are the most dominant factors affecting the costs of environmental regulation. Regulatory complexity has the greatest impact on firms' cost perceptions, followed by firm size, institutional quality, and actual costs of environmental regulation, with the latter having a surprisingly weak impact on perceptions. Following managerial cognition theory, the study recommends simplifying regulations while integrating financial and non-financial measures and environmental awareness into regulatory frameworks and corporate strategies to encourage a more proactive environmental performance. This approach aims to enhance firms’ management of environmental regulation costs and perceptions, offering a comprehensive framework for understanding their multifaceted nature. • Model of factors shaping environmental regulation costs and firms' perceptions. • Firm size and regulatory obligations drive environmental regulation costs. • Regulatory complexity strongly impacts managers' cost perceptions, more than costs. • Managers' cost perceptions shape strategies and environmental investments. • Simplified regulations and eco-investments promote sustainable eco-innovation.