Does the establishment of the Ministry of Environmental Protection matter for addressing China's pollution problems? Empirical evidence from listed companies

This paper uses an event study methodology to examine the stock price reactions of polluting companies traded on stock exchanges in mainland China to an exogenous environmental event, i.e., the establishment of the Ministry of Environmental Protection in 2008, which demonstrates the Chinese government's ambition to enforce environmental protection rules more strictly. We find that, on average, these listed companies experienced a statistically and economically significant abnormal return (AR) of - 3.6% on the event date, indicating an anticipation that these companies would face a harsher regulatory environment as a result of the administrative reform. The market apparently placed great expectations on the administrative reform in regard to addressing China's environmental pollution problems. In addition, we find that compared to their counterparts in the private sector, state-owned enterprises (SOEs) experienced a smaller price decline during the event window, which suggests that SOEs are more likely to enjoy favourable treatment from regulatory agencies. Our empirical evidence, therefore, shows that the selective enforcement of environmental law is a significant concern that tends to undermine the effects of such reforms.