Asian Journal of Economics, Business and Accounting

The implementation of the environmental protection tax law (EPTL) is a comprehensive reflection of China's efforts to green its tax system. Using panel data of A-share listed firms in heavy-polluting industries (2016–2019) and a multi-period difference-in-differences (DID) design, this research systematically explores the impact and internal mechanisms of the green tax law reform on corporate environmental performance. The findings indicate that the EPTL significantly and robustly enhances corporate environmental performance, a conclusion that remains valid after a series of robustness tests. Heterogeneity analysis reveals that the EPTL promotes corporate environmental performance in companies with stronger financing constraints; the effect is more pronounced in companies with higher internal transparency; state-owned enterprises (SOEs) show a stronger improvement in environmental performance, indicating that SOEs can set an example; the background of senior executives is a significant factor influencing the improvement of environmental performance. Mechanism analysis shows that the EPTL primarily enhances corporate environmental performance by strengthening local government enforcement, increasing local government attention to environmental issues, promoting corporate green innovation, and resolving collusion between government and enterprises. Extended analysis indicates that the EPTL does not significantly trigger negative pollution transfer across regions but instead drives corporate green transformation. The research conclusions offer important insights for improving corporate green governance and promoting high-quality national economic development. This demonstrates market-based instruments’ efficacy in reconciling economic-environmental tradeoffs for emerging economies