Valuation Impacts of Environmental Protection Taxes and Regulatory Costs in Heavy-Polluting Industries

In 2016, the issue of the Environmental Protection Tax Law indicated the enhancement of environmental protection in China. This study examines the market reaction to firms in heavy-polluting industries, and the effects of external legal institutional quality and internal environmental disclosure on firm value around the passage of Environmental Protection Tax Law. Using an event study approach coupled with ordinary least square regressions, the researchers find a significantly negative market reaction to firms in heavy-polluting industries, but this negative reaction varies depending on the expected increase in future regulatory costs. Specifically, the above negative reaction is stronger when the firm reveals that itself or its subsidiary belongs to heavy-polluting industry, however it would be mitigated when a firm is in a region with better quality of legal institutions or discloses environmental improvement activities. Overall, the results are consistent with the market perceiving that the environmental protection tax law enacted would increase regulatory costs for firms in heavy-polluting industries, and also show the higher-quality regional legal institutions and more efforts on environmental protection could relieve the market's pessimism caused by uncertainty.