Water resource tax and corporate cost stickiness: evidence from China’s reform

Purpose Given the escalating severity of external environmental issues, governments worldwide have implemented environmental policies to guide firms towards green governance. This paper aims to assess the effect of government stakeholders' environmental considerations on cost management efficiency. Design/methodology/approach Employing the 2016 Water Resource Tax (WRT) policy as a quasi-natural experiment, this study adopts a Difference-in-Difference-in-Differences methodology to examine the effects of government stakeholder orientation on cost stickiness. Findings The WRT policy significantly heightens the cost stickiness in water-sensitive firms, primarily through increasing the adjustment costs associated with productive and R&D investments and elevating optimistic managerial expectations. Furthermore, this impact is more pronounced among firms characterized by higher asset specificity, substantial growth opportunities, and acute water environmental pressures. Practical implications This study highlights the need to consider political and environmental contexts in cost management decisions and provides guidance for the green transformation of water-sensitive firms. Policymakers should consider dynamic factor adjustments and the diversity of firm characteristics when implementing environmental reforms. Social implications This study helps stakeholders better understand cost adjustments that support water stewardship and supports the development of a more scientific water environment supervision system. Originality/value This study advances the literature on cost stickiness by integrating the perspective of government stakeholder orientation. It sheds light on the efficacy of the WRT policy in fostering firms' cost adjustment conducive to environmental stewardship.