The backfired effect of bonus depreciation policy on corporate environmental performance: Evidence from a quasi-natural experiment

Exploiting a quasi-natural experiment on China's bonus depreciation policy (BDP), we use a difference-in-difference design to examine its impact on corporate environmental performance (CEP), and further explore how the nature of the ultimate owner moderates this relationship. Using a sample of Chinese manufacturing firms, we find that treatment firms exhibit significantly worse environmental performance after BDP implementation, relative to control firms. These results imply that BDP induces managerial short-termism, crowding out environmental investments, and eventually worsens CEP (a backfired and unethical outcome). Moreover, BDP's adverse effect on CEP is less pronounced for state-owned enterprises (SOEs) than for non-SOEs. This negative relationship is more pronounced for non-high-tech firms, SMEs (small and medium enterprises), strong financially constrained firms, firms with low analyst coverage, and those within weak government intervention, or low product-market development. Lastly, BDP triggers corporate greenwashing. Our study provides important references for stakeholders to understand the economic consequences of tax incentives in emerging markets.