Environmental responsibility, market valuation, and firm characteristics: Evidence from China

Using a large panel of listed firms in China from 2010 to 2015, this study investigates the valuation effect of corporate environmental responsibility (CER) and firm characteristics that influence such an effect. We implement the ordinary least squares and the fixed effects panel regressions as well as the two-stage least squares regressions that control for potential endogeneity. We find that CER has a significantly positive effect on firm performance. The positive effect is more pronounced for firms in highly polluting industries, with high asset tangibility and with low state ownership. Furthermore, firms with high ownership concentration and low managerial ownership tend to benefit more from their environmentally responsible activities, suggesting that enhanced environmental engagement may serve as a strategic tool in reducing the negative effects of agency cost and weak corporate governance on firm valuation. Our results are robust to alternative measures of performance (Tobin's Q and return on assets).