Description:
Taking China’s Environmental Protection Tax Law, implemented in 2018, as an exogenous shock, this study investigates the effect of an environmental tax on firms’ green transformation behaviors. Our baseline results show that this environmental tax policy has a positive impact on promoting heavily polluting firms’ green mergers and acquisitions (M&As). We also investigate how the effect of the environmental tax is moderated by firm, industry, and regional characteristics. We find that the positive effect of the environmental tax on green M&As is strengthened by non-state ownership, industry competition, and a strong regional legal environment; and it is weakened by firm innovation capability, industry CO2 emissions, and low regional environmental tax rates. Finally, we find that the capital market responds more positively to green M&As in highly polluting firms after the implementation of the environmental tax. This study has important policy implications, providing empirical evidence that may be useful for future improvement in environmental regulations