Does differentiated environmental regulation improve firm performance?

Abstract

We study whether China’s Environmental Performance Grading (EPG) policy—a rule-based, differentiated regulation that exempts Grade-A firms from mandatory production restrictions during heavy-pollution episodes—improves cement firms’ financial performance. Using a plant-level measure of actual policy exposure (the share of a listed group’s clinker capacity holding Grade-A status) and a non-cement building-material control group, we find no significant average effect on profitability or asset turnover. Consistent with theory, the point estimates show a positive, headquarters-based pattern—higher asset turnover, where frequent heavy-pollution alerts make the production-continuity advantage bind, on the revenue margin and without higher physical output—that is consistent with the proposed mechanism but not statistically robust. This evidence is suggestive rather than conclusive: actual exposure exists for only three of the eleven groups, identification in high-alert provinces rests predominantly on one firm, and the interaction does not survive exact-permutation, wild-bootstrap, or randomization inference, and an Oster (2019) bound implies that unobserved selection about 0.56–0.58 times as strong as selection on the observed covariates would eliminate it. Institutional evidence corroborates the channel: differentiated shutdown rules grant Grade-A kilns roughly 45–100 fewer mandatory shutdown days per year.