Impact of Environmental Protection Regulations on Corporate Performance From Porter Hypothesis Perspective: A Study Based on Publicly Listed Manufacturing Firms Data

Abstract

“Porter Hypothesis” believes that environmental protection regulations contribute to cleaner production and green technology innovation which benefit to enhance manufacturing firm performance . We take China’s new “Environmental Protection Regulations (2015), as a quasi-natural experiment, using A-share listed companies in Shenzhen and Shanghai in 2012–2017 as a research sample. Using the propensity score matching and double difference (PSM-DID) method, we empirically test the impact of environmental regulations on the financial performance of these companies. The results show that the new Environmental Protection Law has significantly improved corporate profits of large enterprises large firms. Different from the innovation mechanism emphasized in the literature based on the Porter hypothesis, we find that “Compliance cost heterogeneity” caused by the scale difference of firms better explains the impact of environmental regulations on the profit margin of listed manufacturing firms. Overall, this study contributes novel insights about the economic consequences of environmental regulation and establishes an initial foundation for investigating environmental regulation from the perspective of compliance cost heterogeneity.

Understanding Compliance with Environmental Regulations in the Manufacturing Sector

“…This is particularly evident in the subtheme of Business Benefits, where participants noted improvements in market advantage and brand reputation. These findings align closely with Mu, Wang, and Mohiuddin (2022), who supported the Porter Hypothesis in their research, showing that environmental regulation can lead to enhanced corporate performance through innovation (Mu et al, 2022). Moreover, the Environmental Impact results, such as reduced emissions and better waste management reported by our participants, reflect the advancements discussed by Amor et al (2019) in the treatment of agro-industrial wastewater using advanced oxidation processes (Amor et al, 2019).…”

“…he manufacturing sector stands at a critical juncture where regulatory compliance not only aligns with environmental stewardship but also fosters substantial business advantages and competitive positioning (Huseynov, 2023;Hwang & Kim, 2017;Mu et al, 2022). As global awareness of environmental issues grows, industries face increasing pressure to adapt to stringent environmental regulations, which are evolving to address the complex challenges of sustainability and environmental protection (Borella & Barcellos, 2015;McGarity, 1983).…”

“…The relationship between regulatory compliance and corporate performance is also a critical area of interest. Mu, Wang, and Mohiuddin (2022) build on the Porter Hypothesis, which posits that strict environmental regulations can stimulate innovation that may offset the costs of complying with these regulations and even lead to enhanced corporate performance. Their study reveals that firms adapting proactively to environmental protection regulations often experience a positive impact on their performance, driven by innovation and efficiency improvements (Mu et al, 2022).…”

Mediation Effect of Corporate Tax Burden and the Relationship between Environmental Regulation and Firm Performance

“…Reasonable ERG can promote competitiveness and performance through promoting firm innovation, reducing production costs, improving the internal agency problems, and improving resource utilization [ 6 , 7 , 32 , 33 ]. The “heterogeneity in compliance costs” of different sizes of enterprise can explain the impact of ERG on the company’s profit margins [ 34 ]. Zhang et al [ 35 ] argued that there is an inverted U-shaped relationship between China’s environment regulation policy and the business performance of manufacturing firms.…”