Market response to the hierarchical water environment regulations on heavily polluting firm: Evidence from China

Using event study methodology, this paper examined the effects of water environment regulations on the stock prices of polluting Chinese firms over the past decade. It was found that there were relatively weak market responses to regulations passed by the National People's Congress, China's top legislative body, and more significant market responses to regulations implemented by less powerful administrations. In particular, the market reaction in various industries to the State Council's Water Ten Plan was instant and strong. While most water environment regulations had negative effects on heavy polluters, some recent regulations had positive wealth effects. Because water environment regulations have different effects on shareholder values in different industries, these results could assist in guiding hierarchical water environment regulation policies and portfolio diversification.