Do Fluctuations in Environmental Regulations Inhibit Investment: Evidence from China

Abstract

The trade-off between the goals of promoting economic growth and protecting the ecological environment makes it possible for the government to constantly adjust the intensity of environmental regulation, leading to sharp fluctuations in environmental regulation in the short term. Fluctuations in environmental regulations may trigger concerns among firms and change their investment decisions. The theoretical model of corporate investment decision is used to analyze the inhibitory effect of environmental regulation fluctuations on investment through expected profits, which is empirically validated in this study by data from 255 Chinese prefecture-level cities. The results indicate that environmental regulation fluctuations reduce investors’ expected profits, which in turn inhibit investment. The heterogeneity analysis shows that environmental regulation fluctuations have no significant effect on investment in cities that are geographically closer to the provincial capital, while a greater inhibitory effect of it is revealed in other cities located further away. Therefore, this inhibitory effect should be weakened by reducing the intervention of administrative orders in environmental regulatory behavior, establishing environmental regulatory supervisory agencies, and taking into full consideration the public’s response to fluctuations in environmental regulation. This study can provide policy implications for optimizing government environmental regulation.