Literature Overview and Basic Information
-
Tai, Wei-Hsin & Sun, Ming-Hsiu (2024). “The Effects of Corporate Environmental Protection Policies.” Management Review, 43(3), 41-66.
I. Introduction and Background
In 1992, the United Nations held the Earth Summit (UNCED) in Rio de Janeiro, during which the Rio Declaration emphasized the principles of sustainable development. Since then, companies have been required to quantify, from the perspective of business opportunities and profits, their contributions and performance in environmental conservation and carbon footprint reduction, to embody a management philosophy that reconciles profitability with environmental protection.
Taking corporate carbon emissions as an example within environmental protection issues, the massive emission of greenhouse gases exacerbates extreme weather, raises health concerns, and reduces productivity. To internalize the external costs of carbon emissions into corporate decision-making, many countries have introduced carbon pricing mechanisms, such as emissions trading and carbon taxes.
This study treats environmental protection policies as one of the key elements of corporate performance and empirically examines the economic consequences of following peer firms’ policies. The authors seek to provide deeper insight into peer effects and the formulation of corporate environmental policies.
In the existing literature on imitation effects, most studies suggest that imitation mainly occurs when laggard firms in an industry imitate the leaders in the market. Under different configurations of environmental ratings, definitions of industry peers, and the use of instrumental-variable two-stage regressions to address endogeneity concerns, the authors¡¯ empirical evidence shows that peer effects in environmental protection policies are stronger among market leaders. Furthermore, subsample analyses indicate that pressure from institutional investors may be one of the key driving forces behind environmental peer effects.
Using a two-stage instrumental-variable regression framework, the study further investigates the economic benefits of environmental peer effects. The evidence confirms that imitating the environmental protection policies of industry peers has a positive impact on a firm’s future value and market share.
II. CSR, ESG, and the Focus on Product-Market Peer Effects
Corporate Social Responsibility (CSR) has become mainstream in contemporary business practice, and the United Nations Global Compact regards ESG (Environment, Social, and Governance) as a core set of indicators for assessing corporate sustainability. The environmental dimension of CSR and ESG provides robust tools for evaluating corporate environmental protection policies.
By adopting environmentally friendly product technologies, firms can cultivate a favorable image among environmentally conscious consumers. This study focuses specifically on peer effects in the product market; The empirical premise is that a firm¡¯s adoption of environmental protection policies may affect the absolute or relative advantages of its peers in the competitive environment, thereby prompting those peers to respond with similar policy measures. For example, when a firm acts as a pioneer in adopting environmentally friendly policies in its industry, it may gain advantages in its competitive market.
This research thus regards environmental protection policies as a vital component of corporate performance and examines the economic consequences of following peer firms¡¯ policies. To explore whether firms exhibit imitation behavior toward their peers when formulating environmental protection policies, the study uses a sample of 19,209 U.S. firms from 1996 to 2013. Employing a two-stage instrumental-variable regression approach, the authors investigate the economic benefits associated with environmental peer effects. Under various environmental rating schemes, alternative definitions of industry peers, and instrumental-variable specifications that address endogeneity concerns, the study confirms that imitating the environmental protection policies of industry peers exerts a positive influence on firms¡¯ future value and market share.
III. Research Hypotheses
Firms must regard their capital investments in environmental protection as a crucial element in maximizing corporate value. Through the implementation of environmental protection policies, firms can build positive evaluations and favorable impressions among consumers, customers, investors, and creditors, thereby enhancing product market share, securing more favorable borrowing conditions, and increasing firm value.
Accordingly, the authors anticipate that imitation is likely to occur when environmental protection policies are formulated, and that a firm’s environmental protection policies will be positively related to the practices of its peer firms.
Based on the above reasoning, the authors propose the following hypotheses:
- Hypothesis 1. When formulating environmental protection policies, firms will consider the implemented environmental policies by their industry peers.
- Hypothesis 2a. Compared with leaders, follower firms will exhibit stronger peer effects in environmental protection policies.
- Hypothesis 2b. Compared with followers, leader firms will exhibit stronger peer effects in environmental protection policies.
- Hypothesis 3. In highly competitive industries, firms will more strongly follow their peers¡¯ environmental protection policies.
- Hypothesis 4a. Firms facing stronger financing constraints will be more aggressive in following their peers¡¯ environmental protection policies.
- Hypothesis 4b. Firms facing weaker financing constraints will be more aggressive in following their peers¡¯ environmental protection policies.
- Hypothesis 5. Firms with higher institutional ownership will exhibit stronger peer effects in following their peers¡¯ environmental protection policies.
The authors adopt appropriate variables for measurement, construct empirical models, and conduct descriptive statistics and regression analyses to perform a rigorous quantitative examination.
IV. Empirical Findings
The empirical results show that the following hypotheses are supported:
- Hypothesis 1
- Hypothesis 2b
- Hypothesis 4b
- Hypothesis 5
This study focuses on the peer effects of environmental protection policies. The findings indicate that, with the increasing emphasis on environmental awareness and policies among firms in recent years, companies tend to imitate the environmental protection policies of their industry peers due to considerations of corporate image, competitiveness, and regulatory pressure. Consequently, a significant peer effect exists in overall environmental protection policies. This result remains robust across different definitions of industry peers and regression analyses.
V. Contributions of the Study
This study makes the following contributions to the literature on peer effects and environmental protection policies. First, corporate environmental protection practices are clearly influenced by peer firms, rather than being formulated solely based on the company’s internal considerations. Second, we demonstrate that peer effects extend beyond financial and human capital policies to include environmental protection policies as well. Third, firms with higher revenue or larger scale face stricter regulatory constraints, which in turn intensify the peer effects in their environmental protection policies, indicating a significant impact of environmental regulations. Finally, we provide evidence that imitating the environmental protection policies of industry peers contributes positively to enhancing firm value and market share.
Practitioners Observations and External Validation
The sample employed in this study comprises U.S. firms over the period from 1996 to 2013. In contrast, the commentator was actively engaged in commercial activities bridging Asian vendors and European buyers from 2014 to 2025. This role facilitated close observation of two major supermarket chains: Aldi (established in 1962) and Lidl (established in 1973). Both operate as family-owned enterprises with no plans for initial public offerings (IPOs) and remain each other's primary competitors. Observations reveal that these chains have implemented increasingly stringent environmental regulations on both supplier facilities and products, with specific criteria tightening annually. While numerous small and medium-sized chains strive to compete, Lidl frequently acts as a first-mover in environmental policy. These dynamics lend support to Hypotheses 1 and 4b.
Furthermore, in response to the mandates from Aldi and Lidl, alongside rising global environmental awareness and new legislation, numerous Asian upstream suppliers have become active participants and enforcers of these standards. The corporate "peer effect" has become increasingly significant, validating Hypothesis 2b. Notably, many of these participating firms are publicly listed companies with high institutional ownership, which provides evidence supporting Hypothesis 5.
Although there is a temporal gap of over a decade between the study's sample period and the observation period, and despite the geographical divergence (U.S. firms versus Asia-Europe trade) and a sample size limited to approximately 1,000 firms, the practical outcomes observed by the commentator successfully corroborate Hypotheses 1, 2b, 4b, and 5. This external validation underscores the robustness of the authors' findings, demonstrating the study's excellence and justifying its recognition with the 2024 Best Paper Award (First-Class Honor).
Note: For detailed references, please consult the original article.
*The financial support of the Research Institute for the Humanities and Social Sciences, National Science and Technology Council, is gratefully acknowledged.