The capital market reaction to Central Environmental Protection Inspection: Evidence from China

Central Environmental Protection Inspection (CEPI) is an important innovative measure meant to improve the health of China’s environment. In view of this, based on the "quasi natural experiment" situation of the implementation of CEPI in China, this paper takes as its research sample 155 A-share listed companies located in the provinces in which CEPI was first implemented. Our work uses the event study method to explore the reaction of China’s capital market to this policy implementation. The results show two significant findings. (1) CEPI will cause the capital market to react negatively because of the environmental protection pressure that it brings to bear on corporations; that is, the capital market will experience significantly negative abnormal returns due to the signals sent by CEPI. (2) Further analysis shows that the multiple heterogeneity factors will have an impact on the capital market’s reaction to CEPI. Specifically, at the corporate level, we find that firms that cause heavy pollution, firms that are small-scale, and firms with weak political connections are more sensitive to the market’s reaction to the CEPI policy; at the regional levels, the effect is more significant in areas with high environmental performance. •Research empirically tests the capital market’s reaction to China’s CEPI policy in 2016 using the event study method.•The capital market experiences significantly negative abnormal returns due to the signals sent by CEPI.•Research analyzes the multiple heterogeneity factors at the corporate and regional levels.