Environmental Protection Investment and Market Value

With the increase of environmental supervision in China, environmental protection investment has become an inevitable investment choice for polluting enterprises. However, whether environmental protection investment can bring value to the enterprise has always been a hot topic of debate. The paper takes the 2008-2016 China A-share heavy polluting industry listed companies as the research object, tests the correlation between environmental protection investment and market value. Using the Ohlson valuation model, it is found that environmental investment has a positive impact on the market value. Further, the paper examines two possible paths of environmental investment impact on market value, and the results show that environmental protection investment increases the earnings persistence, but has no significant impact on the cost of equity capital. Therefore, it is concluded that environmental protection investment is conducive to the increase of market value, and the mechanism of environmental protection investment affecting market value is to improve the sustainability of earnings.


Introduction
The report of the 19th National Congress of the Communist Party of China proposed to implement the most stringent ecological environmental protection system, so that a good ecological environment will become a support point for sustained and healthy economic and social development. In recent years, China's environmental governance has increased significantly, and government has issued a series of laws and regulations to protection environment. The environ-mental liability risks and environmental illegal costs of enterprises are increasing. Under the strict environmental supervision system, investment in environmental protection has become an indispensable investment for enterprises.
Can environmental protection investment give enterprises a competitive advantage and value added? Porter [1] believes that appropriate environmental regulatory policies will promote companies to make product or technological innovations. The company's environmental investment behavior not only promotes the innovation and application of clean technology, but also reduces the cost of environmental pollution. At the same time, it may increase productivity and give enterprises a competitive advantage. The Porter hypothesis broke the "pollution paradise hypothesis" and provided a theoretical basis for environmental regulation and corporate environmental protection investment behavior. Part of the research supports the Porter hypothesis, which shows that environmental investment can improve business productivity and financial performance [2] [3]. However, there are also studies that give unfavorable evidence to the Porter hypothesis. For example, Broberg et al. [4] based on the data from five industries in Sweden during 1999-2004, found that the inefficiency is a function of environmental protection investment; Liu and Cui [5] found that environmental protection investment is not conducive to the value of China's heavily polluting industries create.
Overall, the studies show that environmental regulation can promote enterprises to increase investment in environmental protection, and whether environmental investment has promoted the value-added of enterprises, there is still controversy. In order to study the relationship between environmental protection investment and corporate value, this paper tests the impact of environmental protection investment on corporate value, and researches the mechanism of environmental investment to increase corporate value. The results of this study show that under the environmental supervision system of China, environmental protection investment behavior has played a positive role in the sustainable development of enterprises, and the economic incentive for environmental investment to add corporate value may be to increase the earnings of earnings.
The remainder of this paper proceeds as follows. Section 2 reviews the existing literature on environmental protection investment and corporate value, and develops testable hypotheses. Section 3 discusses our research design. Section 4 describes presents descriptive statistics, correlation coefficient and reports our main empirical results. Section 5 presents additional analyses. Finally, Section 6 sets our conclusions.

Theoretical Basis and Research Hypothesis
In this section, this paper provides theoretical arguments motivating hypothesis H1 that environmental protection investment is positively valued by markets.
Then, based on the Ohlson valuation model, this paper explore the mechanism of environmental protection investment affecting market value, and Propose hypotheses H2 and H3.

Environmental Protection Investment and Market Value
With the prominent environmental problems such as smog and water pollution, China has paid more and more attention to environmental protection, and the supervision of heavily polluting enterprises has become more and more strict. Enterprises invest in environmental protection to improve severe pollution and meet social expectations. Therefore, companies investing in environmental protection are conducive to legitimacy. Legitimacy is a resource of an enterprise and can bring competitive advantage to the enterprise. López-Gamero et al. [6] show that environmental protection investment will reduce the pollution of enterprises and enhance the reputation and image of enterprises, which enable them to obtain more social resources, and ultimately bring ecological innovation compensation.
According to the stakeholder theory, the survival and development of any company is inseparable from the participation of various stakeholders. Environmental protection investment is a manifestation of corporate social responsibility, which can enhance the trust of stakeholders in the company, improve the relationship between shareholders and stakeholders, and thus improve the financial performance of the company. From the perspective of the government, good environmental performance can reduce the risk of environmental violations especially when the intensity of environmental control has reached a high level, and companies that actively invest in environmental protection often receive preferential policies such as tax breaks or government subsidies from the government [7]. From the perspective of employees, environmental protection investment is conducive to reducing pollution emissions, creating a good working environment and public image, which is conducive to attracting talents and motivating excellent employees to promote productivity [8]]. From the perspective of consumers, active investment in environmental protection can help promote the differentiation of products and services, enhance the competitiveness of products and services, and enhance consumers' willingness to purchase. From the perspective of investors, environmentally friendly companies are conducive to attracting investors with high environmental responsibility sensitivity, and are more likely to be favored by more investors [9].
In short, environmental protection investment is conducive to the company's recognition of society and stakeholders, improving reputation and image, and thus promoting value added. Therefore, the first hypothesis is proposed: H1: Environmental protection investment is positively valued by markets.

The mechanism of Environmental Protection Investment Affecting Market Value
In hypothesis H1, this paper proposes that environmental investment can promote the increase of corporate value. However, whether environmental investment directly promotes the increase of corporate value or the value increase caused by acting on other variables remains to be discussed. Ohlson [10] shows that if the market value of the firm is the present value of the company's future where MV t = market value at the end of year t, BV t = book value at the end of year t, NI t = net income for year t, and DIV t = net dividends for year t. R = 1 + r, k is the evaluation multiplier, − , where r = the cost of equity and ω is 1 + the growth rate in abnormal earnings.
According to Ohlson [11] valuation model, environmental investment may have a direct impact on corporate value as "other information", or it may indirectly affect corporate value by changing the valuation multiplier k. This paper argues that environmental protection investment is more likely to increase corporate value by increasing the valuation multiplier k. The main reasons are as follows: First, environmental protection investment is unlikely to have an impact on the earnings of the investment year, and more affects the future earnings.
Second, studies show that environmental investment may have an impact on the cost of equity capital. It can be seen from the model that the valuation multiplier k is determined by w which is autocorrelation coefficient of the residual income and r which is the cost of equity capital. Therefore, following Gregory et al. [12] we discuss the impact mechanism of environmental protection investment on the market value of enterprises from the aspects of earnings sustainability and equity capital cost.
First, with respect to earnings persistence, environmental protection investment can improve the company's earnings persistence, mainly reflected in the following three aspects: First, environmental protection investment promotes enterprises to adopt cleaner production methods, and avoid production suspension and rectification. Second, as a long-term investment, environmental investment is more reflected in the outflow of cash in the current period, and the cash inflow brought by it is more reflected in the future. Enterprises investing in new environmental protection projects such as sewage treatment system, recycled lead resource recycling project and slag resource comprehensive utilization project, may invest a large amount of capital, manpower and material resources in the current period of investment construction. However, during the period after it is completed and put into use, it can promote the recycling of resources and reduce the operating costs of enterprises. Third, according to Porter's hypothesis, companies with greater environmental governance investments are more motivated to develop new products and technologies. Through technology or product innovation, environmental companies can enhance their competitive advantage and achieve sustainable development. When the earnings is more sustainable, it can better reflect the future cash flow. The higher the accuracy of the investor's current earnings to predict future earnings, the higher the market value of the company [13]. We therefore hypothesize the following: Second, with respect to cost of equity capital, prior work argues that environmental investment may reduce investor risk expectations from both systemic risk and risk sharing. First of all, for environmentally friendly companies, investors' perceived risk is significantly lower and the required return on investment is lower. Ghoul et al. [14] believe that companies actively undertake social environmental responsibility, which is conducive to reducing the operational risks brought about by environmental scandals, and thus reducing the company's cost of equity. Second, heavily polluting companies that invest in environmental protection may have more investor bases than heavily polluting companies that do not invest in environmental protection, which reduces the systemic risk shared by investors. Heinkel et al. [15] theoretically show that the exclusionary investment of green investors will lead polluters to attract only investors from neutral investors. Therefore, polluting companies have fewer investor bases than green ones. To retain a small number of neutral investors, polluting companies must provide higher expected returns for neutral investors. Li Wenjing and Lu Xiaoyan [16] shows that environmental protection investment has a positive effect on institutional investors' shareholding ratio, indicating that investors are more inclined to invest in enterprises with higher environmental protection investment. In summary, companies with lower equity capital costs have higher market value, and it is expected that the cost of equity capital of environmental investment companies is lower. Based on this, hypothesis 3 is proposed: H3: Environmental investment increases the market value of the company by reducing the cost of equity capital.

Research Variables and Economic Models
If market value, MV, is the present value of future expected dividends, then Ohlson (1989) show that value will be a linear combination of book value (BV), net income (NI), dividends (DIV), as shown in model (1). In order to examine the relationship between environmental investment and market value, following Rees and Valentincic [17], we add the environmental investment variable and intersections of it with the other three variables to model (1), yielding the following model (2): Industry Year In order to test the impact of environmental protection investment on the cost of equity capital, following to Xiao Zuoping [18], this paper builds model (5)

Sample and Data
Considering the environmental protection policies in China, this paper takes the 2008-2017 A-share heavily polluting industry companies as research samples. According to the catalogue of classified management of environmental checking industry of listed companies in China, 16 types of heavily polluting industries will be included in the scope of sample research. We choose 2008 as our final year because in 2008 green financial policy began to be implemented in China.
In addition, we delete the sample companies of ST and ST*, and delete the sample companies for missing values.
We hand-collect the environmental protection investment data from the notes of the annual report disclosed by the companies, calculated by the amount of construction-in-progress that belongs to the environmental protection in the current period. The data of other variables are all from the CSMAR database. Table 2 shows the statistical description results for the variables. As can be seen from    Table 4 shows the regression results for model (1)  According to the Ohlson (1995) valuation model, the increase in the valuation coefficient before the net profit NI may be due to the change in the residual income growth rate w or the equity capital cost r. Therefore, the results in Table 4 initially prove that environmental investment can promote the increase of market value, and the path of environmental investment to increase market value may be to make the earnings continue to grow or reduce the cost of equity capital.

Main Regression Results
DOI: 10.4236/me.2019.102027  The data of environmental investment (EI) is hand-collected from the notes of the companies' annual report, the data of other variables are all from the CSMAR database. Figures in parentheses indicate t-values. ***, **, * represent statistical significance at 1%, 5%, 10%, respectively (two-tail). Table 5 shows the regression results of model (3) and model (4). First, it can be seen that the coefficients of the EI*NI intersection are significantly positive regardless of which regression method is used. Second, the coefficients of the EI*NI intersection are also significantly positive, whether or not the control variable is added. This shows that environmental investment can increase the earnings persistence, and this result is robust. Specifically, model (3) examines the effect of environmental protection investment on the sustainability of net profit without adding control variables. When using OLS mixed regression, the coefficient of EI*NI is 0.017, at 5% level significantly. Therefore, the regression results of model (3) and model (4) verify the establishment of hypothesis 2, that is, environmental protection investment increases the market value of the enterprise by increasing the earnings persistence. Table 6 shows the regression results of model (5). Among them, the second column is the regression result when the cost of equity capital R is R_PEG. It can be seen that the coefficient of the environmental investment variable EI is −0.012, but it is not significant. The third column and the fourth column are regression results obtained when R is taken as R_OJN and R_AVE, respectively, and it is noted that the coefficient of EI is still negative but not significant at this time. It can be seen from Table 6 that in any of the three methods of measuring

Conclusions
In order to better understand the value of environmental protection investment and clarify the effectiveness of environmental supervision policies, this paper examines the relationship between environmental protection investment and corporate market value by using A-share listed companies in the heavily pollut- The research conclusions of this paper show that a strict ecological environmental protection system will promote enterprises to invest in environmental protection, promote production methods, and achieve synergy between development and environmental protection. Although environmental protection investment currently occupies corporate resources and leads to cash outflows, in the long run, environmental protection investment will help stabilize the operation of the company and make the company's earnings more persistent.

Conflicts of Interest
The author declares no conflicts of interest regarding the publication of this paper.