The Impact of the Environmental Protection Tax Law on Earnings Management

Abstract

The Environmental Protection Tax Law of China was officially implemented on January 1, 2018. The pollutant discharge fee system has since been replaced by a more mandatory and restrictive tax law. The environmental fee-to-tax reform is an essential portion of the development of the green tax system in China, and it is tasked with the vital aim of promoting the sustainable development of Chinese economy. This paper takes the implementation of the EPT Law as a quasi-natural experimental material and employs the difference-indifferences model and other empirical models to examine the differences in corporate earnings management before and after the policy shock for A-share listed Chinese companies from 2015-2021. The empirical results show that the implementation of the EPT Law effectively promotes Chinese firms to conduct income-decreasing earnings management and such an impact has a greater effect on SOEs, large-size firms and firms in developed regions. Moreover, according to the mediating effect analysis, this paper also identifies that the above promotion impact can be attributed to media attention. The above results show that Chinese government still needs to further optimize this tax law and focus on the coordination between different environmental policies to facilitate sustainable development. Therefore, this paper proposes policy recommendations from four perspectives: corporate governance, accounting standards, environmental laws and regulations, and government supervision.