The Deterrence Effect of the Environmental Regulation: The Influence of the Penalized Firms on Peer Firms’ Environmental Investment Decision

This paper studies the deterrence of governmental environmental regulation from the perspective of peer effect. With the financial data of listed companies and firm-level penalties manually collected in the period between 2007 and 2015, the Heckman model is adopted to test the deterrence from the target firms to peer firms, the empirical results show that government environmental regulation has deterrent effect, increasing the environmental protection investment of penalized firms and the peer firms. Considering the characteristics of target penalized firms and the penalty, when the target penalized firm is of big size, severely punished or reported, the deterrence effect to peer firms is much stronger. Specially, the industry competition can strengthen the deterrence effect. Therefore, the government should improve the certainty, typicality and severity of punishments, strengthen the informal supervision institution, such as public opinion, in the implementation of environmental regulation, and market-oriented reforms in China can strengthen the effectiveness of environmental regulation via competition.