Leveling Up Your Green Mojo: The Benefits of Beneficent Investment

We study corporate investment responses to changes in environmental regulations. Using a manually collected dataset on project investment in China and differentiating the scope of positive externalities a project may generate, we show that local firms boost their environmental investment after their city is targeted for heightened environmental regulation. The effect is mostly driven by "beneficent investments"-environmental projects that not only benefit the firm but also directly spill over to society at large. The increased environmental spending predominantly focuses on long-term projects. Non-state-owned firms exhibit a more pronounced reaction compared to their state-owned counterparts. Targeted cities experience a significant increase in media coverage of local environmental issues. City officials are more likely to be promoted if they meet pre-set environmental targets or reduce pollution. Firms spending more on green investments pay less taxes, garner more subsidies, and secure more bank loans. Targeted cities with larger corporate environmental investments curb emissions, improve local employment, and attract high-quality firms to a greater extent. Heavily polluting firms contribute less to the city's tax revenues and speed up their expansion into non-polluting sectors. Local firms investing more in environmental projects have larger value gains and lower downside risk, produce more green patents, and experience greater labor productivity. Our findings highlight the role of regulatory mechanisms in enabling environmental investment to be both value-and values-enhancing.