Exploring the Role of Environmental Regulation and Technological Innovation in Financial Performance: Evidence from Chinese Heavy-Polluting Industry

Abstract

Environmental regulation is an important guarantee to realize the balanced development of economy and environment, and is the policy guidance of the government to the resource utilization of companies. Environmental regulation will make companies increase costs, and also promote companies to explore technological innovation. How to reverse the negative cost effect of environmental regulation and improve financial performance is a problem that the government and companies need to think about together. Based on the data from 2015 to 2019 of China’s heavy-polluting industry of listed companies, this paper analyzes the impact of environmental regulation on financial performance. The results show that: (1) environmental regulation inhibits firms’ short-term and long-term financial performance. Environmental regulation has formed the negative effect of cost crowding out; (2) environmental regulation positively affects technological innovation. Environmental regulation can stimulate companies to actively explore technological reform to cope with the requirements and restrictions of environmental regulation policies; (3) technological innovation is not significantly negatively correlated with corporate financial performance. Technological innovation input cannot directly lead to the improvement of financial performance in the current period; and (4) technological innovation positively mediates the relationship between environmental regulation and financial performance. That verifies a weak “Porter Hypothesis”. “Innovation compensation effect” exists, and technological innovation can partially offset “cost crowding out effect” and slow down the inhibition relationship of environmental regulation on financial performance, but the innovation effect does not offset the environmental cost. According to the research results, environmental regulation still has a negative effect on the financial performance of listed companies in China’s heavy-polluting industries. The government should formulate strict and stringent environmental regulation policies, guide companies to rationally use resources and protect the environment. Instead of passively responding to policies, companies should actively seek new technologies and alternative sources of energy. Companies try to amplify the compensation effect of technological innovation, reduce the cost crowding out effect of environmental regulation, and improve their value.