Vertical regulatory reform strengthens water pollution control in Chinese industry

Environmental federalism asks how regulatory authority should be allocated across government levels. We exploit the staggered release of provincial plans for China's sub-provincial environmental vertical management reform and use listed-firm data for 2012 to 2023 in a staggered difference-in-differences design. The estimand is the intention-to-treat effect of plan announcements and the expectations they induced. Following plan release, firms' comprehensive water pollution-equivalent index declined significantly. The baseline coefficient is -0.165, or approximately 0.037 sample standard deviations. Because the data provider has not disclosed the index's scaling convention, we do not interpret this estimate as a percentage change in emissions. The result is concentrated in the announcement and expectation-formation stage. Moving treatment dates forward by one year or excluding the baseline treatment year produces insignificant estimates, consistent with anticipatory compliance before restructuring is complete. Mechanism evidence is consistent with greater local-government environmental attention and stronger grassroots enforcement. Responses are stronger where political constraints are weaker and among heavy-polluting and low-ESG firms. The average green innovation effect is insignificant, although heavy-polluting status significantly moderates that response. The findings show how a hybrid vertical-horizontal arrangement and credible reform commitments can shape firm behavior before full institutional implementation.