Heterogeneous Environmental Regulations and the Market Value of Firms

Environmental regulations are important drivers making organizations take their environmental performance seriously. Environmental regulatory mechanisms include ‘carrots’ or ‘sticks’—they can be incentive or coercive-based. The question exists on which type of mechanism would be most effective in getting organizational attention. The market value of firms can also be affected by these regulatory policies—and provide evidence or further motivation for action. Thus, we empirically investigate stock market reactions to heterogeneous environmental regulatory mechanisms. By using a sample of 301 environmental regulation events published by 193 listed Chinese firms between 2010 and 2020, we find that a significant positive stock market reaction to environmental incentive initiatives exist. We also find a significant negative stock market reaction when environmental penalties from coercive mechanisms exists. We also find there is no significant difference in the value of the market reaction between incentive-based and coercive regulations. Our empirical analysis reveals that monetary reward has greater positive market reaction towards governmental reward and operational disruption penalty has negative market reaction to governmental penalty. However, governmental level—federal versus localized measures—of environmental regulations implementation does not play a moderating role. These findings give important policy and organizational insights as businesses seek meet legitimacy gains from environmental regulatory mechanisms.