Does environmental regulation affect stock price crash?-Evidence from polluting firms in China

The implementation of new environmental protection law (NEPL) in 2015 has further strengthened the environmental regulation, which has a serious impact on firms and a profound impact on firm behavior. This paper takes the NEPL implementation in 2015 as a quasi-natural experiment and takes Chinese A-share listed companies as research samples, to investigate the impact of the NEPL implementation on the stock crash risk of heavily polluting firms and its mechanism. It is found that the NEPL implementation increases stock price crash of heavily polluting firms, which has a certain impact on market stability. The influence mechanism is that the NEPL implementation brings policy pressure to heavy polluting firms, which leads to a significant increase in the bankrupt risk and a decline in the quality of information disclosure of heavy polluting firms, thus exacerbating the stock crash risk. The heterogeneity analysis shows that the above results are not changed by corporate performance and property rights, and are mainly reflected in the samples with poor audit quality, high institutional ownership, low marketization level, and strong environmental regulation. This paper enriches the related research on the influencing factors of stock price crash and the economic consequences of the NEPL implementation and provides research enlightenment for further improving environmental policies to avoid its negative impact. Our findings demonstrate that the negative association between environmental regulation and stock crash risk is more pronounced in environmentally sensitive firms.