By assuming a scenario where corporations are facing increasingly stringent environmental regulation, this paper creates a theoretical framework that suggests the mechanism of how environmental regulation impacts corporate profit through the technical level. With a panel data of 900 listed corporations in China’s heavily-polluting industries from 2012 to 2016, a dynamic and static panel model and threshold model are built to present the consistency between our theoretical framework and empirical results, which indicate that the influence of environmental regulation has a threshold effect and is dependent on corporate technical level. The robustness tests on the method and variables are conducted to guarantee the robustness of our regressions. The results show that on the one hand, the marginal impacts of environmental regulation and technical level on corporate profit are mutually dependent on each other, and there is a substituting effect of environmental regulation and technical level on stimulating profit growth if the technical level is sufficiently high. On the other hand, when the technical level is lower than a certain value, the interaction effect of environmental regulation and technical level turns into a compounding effect, but corporations are fairly efficient at shifting their technical level to proper ranges where they can increase their profits by taking advantage of environmental regulations.
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