Governmental inspection and firm environmental protection expenditure: Evidence from China

There has been much debate about whether firms will allocate capital for environmental protection, which highlights the importance of promoting and motivating firms to invest in the environment. Using China's central inspection of firms' environmental protection as a natural experiment, this paper adopts a difference -in-differences method to investigate how these government inspections affect firms' environmental investments. Empirical results show that firm environmental investment is significantly higher in inspected regions than in uninspected ones. By strengthening law enforcement, government inspections can have a significant impact on firms' environmental decision-making processes. As firms improve their environmental behaviour, central in-spections promote reductions in pollutant emissions, which facilitates greener and cleaner production methods. However, the higher compliance costs for businesses under these tighter regulations squeeze corporate activity and margins. This paper reveals the micro-mechanisms behind the real effects of government inspections on firms' environmental investments, providing timely implications for regulators concerned with environmental protection.