Environmental Regulation and Corporate Performance: Evidence from Chinese Heavily Polluting Firms

Against the backdrop of China’s “Dual Carbon” goals, the impact of environmental regulation on heavily polluting firms has emerged as a critical point of academic and policy discourse. This study treats the implementation of China’s New Environmental Protection Law (NEPL) as a quasi-natural experiment and employs a difference-in-differences (DID) framework to estimate its effect on corporate performance. Our empirical results demonstrate that the NEPL significantly enhances the financial performance of heavily polluting firms, suggesting that stringent regulation does not necessarily come at the expense of economic efficiency. Mechanism analysis indicates that the law facilitates performance gains by optimizing managerial efficiency and mitigating information asymmetry resulting from heightened capital market scrutiny. Furthermore, heterogeneity analysis reveals that this positive impact is more pronounced among large-scale enterprises, non-state-owned enterprises (non-SOEs), and firms with robust green innovation capabilities. These findings provide important implications for policymakers, underscoring the role of stringent environmental regulation in driving corporate performance while simultaneously advancing environmental policy objectives.