State Ownership, Environmental Regulation, and Corporate Green Investment: Evidence from China's 2015 Environmental Protection Law Changes

Exploiting the regulatory change in China's Environmental Protection Law in 2015 as a plausibly exogenous shock to the stringency of pollution control, we evaluate the joint role of state ownership and environmental regulation in shaping firms' environment-friendly (green) investments. Using a difference-in-differences methodology, we find that state-owned enterprises (SOEs) make significantly more green investments than non-SOEs in response to the regulatory change. We propose and empirically analyze four potential mechanisms that may drive this result: (i) environment-related government subsidies granted to SOEs, (ii) political promotion incentives of SOEs' top management, (iii) government administrative intervention, and (iv) SOEs' concern for social welfare. We find strong support for the last mechanism whereby SOEs undertake greater green investments due to their greater concern for social welfare, as evidenced by the fact that SOEs making greater charitable donations and those controlled by local governments (and thus more bonded with local communities) make greater green investments. Consistent with this interpretation, we show that regions where SOEs have a greater economic influence improved their air quality to a greater extent after 2015 than regions where non-SOEs are more dominant. In sum, we demonstrate that state ownership and environmental regulation complement one another in motivating corporate green investment. Our results highlight the important implications for the effectiveness and interplay of different government tools in addressing environmental issues.