Environmental legislation and capitalization of corporate environmental expenditure: Evidence from China

Abstract

Although corporate environmental performance has received widespread attention and its economic consequences have been studied in the literature, little is known about the motivation of firms to choose different environmental strategies (corporate environmental expenditures). Constructing an indicator for the capitalization of corporate environmental expenditures, we explore corporate environmental strategies. This paper investigates the impact of environmental legislation on the capitalization of corporate environmental expenditures. By analyzing data on manual environmental expenditures of Chinese listed companies from 2011 to 2020, we find that implementing the new Environmental Protection Law (EPL) can enhance the capitalization of corporate environmental expenditures of high polluting firms. The effect is stronger for firms with higher external legitimacy pressures, such as those with greater public supervision and environmental enforcement. Firms with more internal resources are more likely to experience this effect, as evidenced by lower financing constraints and less managerial myopia. Further mechanistic studies suggest that implementing new EPL raises environmental media attention and perceived environmental risk among high polluting firms. This paper contributes to the environmental accounting literature by introducing a novel measure of corporate environmental strategy—the capitalization of corporate environmental expenditures. It investigates the effect of environmental regulation on the capitalization of corporate environmental expenditures to provide a reference for polluting firms’ corporate environmental strategy and the implementation of the EPL in China.