Environmental Regulatory Independence and Corporate Environmental Performance

We examine the impact of environmental regulatory independence on corporate environmental performance. Before 2016, local and central state-owned enterprises (SOEs) in China headquartered in jurisdictions far from central government supervision had poor environmental performance. The 2016 environmental verticalization reform transferred the management authority of local Environmental Protection Bureaus (EPBs) from local governments to provincial EPBs. We find that local SOEs’ corporate environmental performance significantly improves as local EPBs gain more regulator independence. However, the reform did not affect the environmental performance of central SOEs, which often outrank provincial EPBs, or privately owned enterprises (POEs), which were already managed by local EPBs before the reform. Further analysis indicates that the improvement in corporate environmental performance depends upon local governments’ environmental attention and regulatory capture. Although local SOEs increased abatement investments, the reform does not negatively affect their revenue, profitability, and valuation. This study suggests that policymakers should consider political rankings to improve environmental governance and enhance transparency in regulatory processes to mitigate rent-seeking behaviors.