Going Green: The Effect of Environmental Regulations on Firms
Dr. Xi Wu
Assistant Professor
Haas School of Business
University of California Berkeley
We study the overall effect of environmental regulations on firm valuation and policies. Using the universe of effective Environmental Protection Agency (EPA) rules and the relevance of these regulations to each industry, we construct a time-varying and industry-specific measure of EPA regulatory restrictions. We find that stricter EPA regulations are associated with an improvement in firm valuation and a reduction in pollution. Investigating the potential underlying mechanism, we find that, subsequent to EPA regulations, firms increase innovations, especially “green” innovation, and also experience improved performances. Moreover, the positive valuation effect is more pronounced for firms with high existing innovative abilities. Our results are mostly consistent with the view that proper environmental regulations can encourage firms’ innovative activities, thereby enhancing productivity. Additional tests do not support a number of alternative explanations, including disproportional regulatory burden, investor or consumer preferences for greenness, and reduction in regulatory uncertainty.