New environmental protection law, polluting enterprises and capital structure: A dynamic analysis

Abstract

This study investigates the effect of environmental regulation on corporate capital structure from a dynamic perspective, using the enactment of China's new Environmental Protection Law (new EPL) in year 2015 as a quasi-natural experiment. The findings reveal that the implementation of the new EPL significantly reduces the asset-liability ratios of heavily polluting enterprises, and the effect is stronger in the long term than that in the short term. Furthermore, the policy effects exhibit heterogeneity: The law's impact on capital structure is stronger for small-scale enterprises and enterprises in China's eastern and western regions. Additional analysis indicates that decreased operational efficiency and improved profitability serve as short-term and long-term channels, respectively, through which the new EPL affects corporate capital structure.