Does bargaining power mitigate the relationship between environmental regulation and firm performance? Evidence from China

With the increasing amount of attention given to ecological protection, the trade-off between environmental regulation and economic development is at the center of academic and policy debates. Using a sample of 1157 listed manufacturing firms for the period from 2012 to 2017, we investigate the relationships between different types of environmental regulations and both actual and expected firm performance and further assess the moderating effect of firm bargaining power on these relationships. The results indicate that (1) mandatory environmental regulation has negative effects on firm performance, whereas voluntary environmental regulation contributes to both actual and expected performance. (2) Comparing the expected performance with the actual performance, the results suggest that investors overreact to environmental regulation. Specifically, investors' expectations of the negative effects of mandatory regulation are worse than they actually are, whereas investors also overestimate the benefits of voluntary regulation. (3) The firm bargaining power mitigates the negative effects of mandatory environmental regulation on the firm performance. (4) There are regional heterogeneity and firm-level heterogeneity in the relationship between environmental regulation and firm performance. Finally, these findings confirm the Porter Hypothesis and provide some policy implications for China to optimize environmental regulation and promote firm performance.

Automated summary

This study investigates the relationships between different types of environmental regulations and firm performance. The results show that mandatory environmental regulation has negative effects on firm performance, while voluntary environmental regulation contributes positively to performance. Investors tend to overreact to environmental regulation, overestimating the benefits of voluntary regulation and the negative effects of mandatory regulation. Firm bargaining power can mitigate the negative effects of mandatory regulation on performance.