Environmental Protection Tax and Firms’ ESG Investment: Evidence from China
Does environmental protection tax (EPT) improve firms’ environmental governance performance? Previous studies ignore that EPT affects firms' environmental governance behavior by increasing discharge and non-compliance costs. To fill this gap, we estimate the impact of EPT on firms' environmental, social, and governance (ESG) investments using Chinese listed firms during 2013-2020. we propose two key hypothesises: "Hypothesis 1A. EPT increases the firm’s green-producing and green-responsibility investment" and "Hypothesis 1B. EPT improves the quality of a firm’s environmental information disclosure". We estimate the impact of EPT on firms' environmental, social, and governance (ESG) investments using Chinese listed firms during 2013-2020. To evaluate firms’ ESG activities, we construct specific E, S, and G indicators relating to the environment, including the firm’s green-producing investment, green responsibility investment, and environmental information disclosure, which highlight the key impact of EPT on firms’ environmental governance. The three dimensions (E, S, and G) of ESG are often considered independent in most studies. but they can be relevant on an environmental level, reflecting the different ways in which corporate environmental governance is conducted. EPT is measured at the firm level using pollution discharge fees from 2013 to 2017 and pollution discharge taxes from 2018 to 2020. We find that EPT significantly forces firms to engage in more ESG activities after controlling for firm characteristics, firm-level, and year-level fixed effects. Our findings are robust to IV approaches, Heckman Correction, panel Generalized Method of Moments (GMM) estimations, an alternative EPT measure (EPT standards at the prefecture-level city), and ESG measures (ESG scores from a third party), as well as a group test. We also investigate the channel through which EPT boosts firms' ESG activities. One is an increasing tax payment as polluting discharges increase. The other is the ex-post noncompliance cost because EPT imposes strict penalties on violators, it includes illegal costs, negotiation costs, and litigation costs. We find that EPT has a positive impact on ESG in firms with greater cost pressure, which is measured by highly polluting industries and experiences with environmental controversy. Furthermore, we find that the ESG improvements are more significant in firms that are privately controlled, located in areas with sound environmental protection justice, and have weaker competitiveness.
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Data sources are composed of four parts. (1) EPT data were from the notes of the financial statement, we used pollutant discharge fee before the reform of ‘environmental protection fee to tax’ in 2018 and environmental tax after the reform. (2) We construct specific E, S, and G indicators relating to the environment, including the firm’s green-producing investment, green responsibility investment, and environmental information disclosure, which highlight the key impact of EPT on firms’ environmental governance. Environmental investment data are related to environmental capital expenditure from the notes of firms’ financial statements. We distinguish them into green producing investment, green responsibility investment. firms’ Environmental protection investment covers the investment in equipment renovation, upgrading, maintenance and operation expenses, energy conservation and emission reduction, governance of air, water, and solid pollutants, and construction of environmental protection projects. These activities directly affect firms’ production, which is called green-producing investments. It also includes investments unrelated to production, such as investments in training, publicity, and education on environmental protection, health and hygiene, poverty alleviation by environmental protection, afforestation, environmental greening, beautification and restoration, ecological construction, and public welfare funds. These activities won’t directly affect firms’ production but improve the welfare of stakeholders, which is called green responsibility investment. Specifically, green-producing investment is measured by two indicators. One is the natural logarithm of the green-producing investment scale plus 1, denoted as Einvest. Another is the ratio of green-producing investment to an annual average asset, denoted as Einvestratio. Similarly, Green responsibility investment is measured using the natural logarithm of the green social responsibility investment scale plus 1 and the ratio of green-responsibility investment to an annual average asset. (3)We obtain firms’ characteristic data from the China Stock Market & Accounting Research (CSMAR) database. (4) Environmental information disclosure data comes from annual reports, social responsibility reports, environmental reports, and environmental protection-related contents disclosed on firms’ websites. We remove the firms in the financial industry and firms with abnormal trading and missing data.