How do the China Pollution Discharge Fee Policy and the Environmental Protection Tax Law affect firm performance during the transitional period?

The Chinese authorities revised its Pollution Discharge Fee Policy and officially implemented the Environmental Protection Tax Law on January 1, 2018. Considering the importance of such a reform, we utilise the ordinary least squares and probit regression models to explore the effects of these policies on firm performance during the transitional period of 2016 to 2019. We find that fee rates are negatively related to firm financial performance, i.e. profitability and development capability, and positively associated with firm environmental performance, i.e. corporation social responsibility. We applied the IV 2SLS regression model to control for firms’ research and development investment, and the empirical results remain the same. Regarding subsample tests, these policies have stronger impacts on firm performance among heavy polluters and non-state-owned enterprises than those of environmental friendly firms and state-owned enterprises. The empirical results hold after we control for various potential endogeneity issues. The findings of this article may assist the authorities to adjust the tax law, so as to protect the environment and relieve the negative impact on firm performance simultaneously.