Environmental Tax Reform and Corporate Green Transformation: Evidence from a Quasi-Natural Experiment

This study explores the impact of environmental regulation on corporate green performance in the context of China's water resource tax reform. The reform, which replaces the previous fee-based system with a tax-based mechanism, represents a significant shift aimed at enhancing water conservation and sustainable development. Despite its importance, the firm-level implications of this reform for Environmental, Social, and Governance (ESG) performance remain insufficiently explored. Given the rising global concern for ecological sustainability and the urgent need for effective regulatory tools, understanding how tax-based environmental policies affect firms' strategic behavior provides both theoretical and practical significance. This study therefore addresses a key research gap and contributes to the ongoing debate on the economic consequences of environmental governance in developing countries. To investigate the practical impact of the water resource tax reform, we examine a sample of listed firms in the A-share market from 2013 to 2021, with a particular focus on high water-consuming enterprises which are directly affected by the reform. A difference-in-differences (DID) approach is employed to estimate the causal effects. Multiple robustness checks and heterogeneity analyses are conducted to ensure the reliability and consistency of the results. In addition, we explore moderation effects by performing mechanism analysis to uncover underlying channels. The main result demonstrates that the water resource tax reform significantly improves the ESG performance of targeted firms. After conducting a series of robustness tests such as matching method, confounding policy exclusion and instrumental variable technique, the main results of this study remain unchanged. The positive effects are more pronounced among state-owned enterprises, non-high-tech firms and companies located in western regions. In addition, the positive relationship is moderated by pollution intensity and financial pressure. Mechanism tests indicate that stricter government regulation drives firms to increase green investments, pursue green innovation and accelerate industrial upgrading as adaptive strategies. Furthermore, we find that enhanced ESG performance contributes to higher firm value, suggesting financial benefits of sustainable practices. In summary, these findings highlight the effectiveness of the environmental regulation in promoting corporate green transformation and sustainable development. The results also underscore the importance of implementing targeted regulatory measures. This study provides policy insights for developing countries and regions facing significant environmental governance challenges.