Environmental regulation and the proliferation of zombie firms: evidence from China

Yunguo Lu; Jing Liang; Xiaojun Yu; Lin Zhang

doi:10.1007/s11149-025-09504-w

Environmental regulation and the proliferation of zombie firms: evidence from China

Yunguo Lu (Co-first Author)
, Jing Liang (Co-first Author)
, Xiaojun Yu (Co-first Author)
, Lin Zhang^* (Co-first Author)

^*Corresponding author for this work

School of Energy and Environment

Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review

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Abstract

This paper examines the impact of environmental regulation on the emergence of zombie firms within China’s pollution levy system. Using firm-level data from multiple sources and a difference-in-differences design, we show that imposing a higher level of pollutant levy rates significantly elevates the risk of firms becoming zombies. Switching to a more stringent policy increases the risk of becoming a zombie firm by 6.2%. Consequently, we find that being a zombie firm implies that it allocates fewer resources to pollution abatement, exhibiting higher pollution intensity. We also show that less productive firms and state-owned firms are more prone to becoming zombie firms when facing with increased level of environmental regulation stringency. This study thus provides novel insights into the unintended risk of zombie firm proliferation as a result of increasing environmental regulation. © The Author(s) 2025.

Original language	English
Article number	5
Number of pages	36
Journal	Journal of Regulatory Economics
Volume	69
Online published	26 Dec 2025
DOIs	https://doi.org/10.1007/s11149-025-09504-w
Publication status	Published - 2026

Funding

This work was financially supported by Zhejiang Provincial Philosophy and Social Sciences Planning Project “The 3rd Plenary Session of the 20th CPC Central Committee and the 5th Plenary Session of the 15th CPC Provincial Committee Spiritual Research and Interpretation (No.33),” Zhejiang Sci-Tech University (23092085-Y), National Natural Science Foundation of China (72574051), the Research Grants Council of Hong Kong (N_CityU146/23), and the Science and Technology Innovation Commission of Shenzhen Municipality (JCYJ20240813153136047).

Research Keywords

China
Environmental investment
Environmental regulation
Pollution intensity
Pollution levy
Zombie firms

Publisher's Copyright Statement

This full text is made available under CC-BY 4.0. https://creativecommons.org/licenses/by/4.0/

RGC Funding Information

RGC-funded

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10.1007/s11149-025-09504-w

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title = "Environmental regulation and the proliferation of zombie firms: evidence from China",

abstract = "This paper examines the impact of environmental regulation on the emergence of zombie firms within China{\textquoteright}s pollution levy system. Using firm-level data from multiple sources and a difference-in-differences design, we show that imposing a higher level of pollutant levy rates significantly elevates the risk of firms becoming zombies. Switching to a more stringent policy increases the risk of becoming a zombie firm by 6.2\%. Consequently, we find that being a zombie firm implies that it allocates fewer resources to pollution abatement, exhibiting higher pollution intensity. We also show that less productive firms and state-owned firms are more prone to becoming zombie firms when facing with increased level of environmental regulation stringency. This study thus provides novel insights into the unintended risk of zombie firm proliferation as a result of increasing environmental regulation. {\textcopyright} The Author(s) 2025.",

keywords = "China, Environmental investment, Environmental regulation, Pollution intensity, Pollution levy, Zombie firms",

author = "Yunguo Lu and Jing Liang and Xiaojun Yu and Lin Zhang",

year = "2026",

doi = "10.1007/s11149-025-09504-w",

language = "English",

volume = "69",

journal = "Journal of Regulatory Economics",

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TY - JOUR

T1 - Environmental regulation and the proliferation of zombie firms

T2 - evidence from China

AU - Lu, Yunguo

AU - Liang, Jing

AU - Yu, Xiaojun

AU - Zhang, Lin

PY - 2026

Y1 - 2026

N2 - This paper examines the impact of environmental regulation on the emergence of zombie firms within China’s pollution levy system. Using firm-level data from multiple sources and a difference-in-differences design, we show that imposing a higher level of pollutant levy rates significantly elevates the risk of firms becoming zombies. Switching to a more stringent policy increases the risk of becoming a zombie firm by 6.2%. Consequently, we find that being a zombie firm implies that it allocates fewer resources to pollution abatement, exhibiting higher pollution intensity. We also show that less productive firms and state-owned firms are more prone to becoming zombie firms when facing with increased level of environmental regulation stringency. This study thus provides novel insights into the unintended risk of zombie firm proliferation as a result of increasing environmental regulation. © The Author(s) 2025.

AB - This paper examines the impact of environmental regulation on the emergence of zombie firms within China’s pollution levy system. Using firm-level data from multiple sources and a difference-in-differences design, we show that imposing a higher level of pollutant levy rates significantly elevates the risk of firms becoming zombies. Switching to a more stringent policy increases the risk of becoming a zombie firm by 6.2%. Consequently, we find that being a zombie firm implies that it allocates fewer resources to pollution abatement, exhibiting higher pollution intensity. We also show that less productive firms and state-owned firms are more prone to becoming zombie firms when facing with increased level of environmental regulation stringency. This study thus provides novel insights into the unintended risk of zombie firm proliferation as a result of increasing environmental regulation. © The Author(s) 2025.

KW - China

KW - Environmental investment

KW - Environmental regulation

KW - Pollution intensity

KW - Pollution levy

KW - Zombie firms

UR - https://www.scopus.com/pages/publications/105026271864

UR - https://www.scopus.com/record/pubmetrics.uri?eid=2-s2.0-105026271864&origin=recordpage

U2 - 10.1007/s11149-025-09504-w

DO - 10.1007/s11149-025-09504-w

M3 - RGC 21 - Publication in refereed journal

SN - 0922-680X

VL - 69

JO - Journal of Regulatory Economics

JF - Journal of Regulatory Economics

M1 - 5

ER -

Environmental regulation and the proliferation of zombie firms: evidence from China

Abstract

Funding

Research Keywords

Publisher's Copyright Statement

RGC Funding Information

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Correction: Environmental regulation and the proliferation of zombie firms: evidence from China

NSFC: Asset-stranding Risks of Energy Firms under the Carbon Neutrality Goals and Spillover Effects on the Capital Market in mainland China and Hong Kong

Cite this

Environmental regulation and the proliferation of zombie firms: evidence from China

Abstract

Funding

Research Keywords

Publisher's Copyright Statement

RGC Funding Information

Access Output

Other Access Options

Permanent Link

Other Files and Links

Fingerprint

Research output

Correction: Environmental regulation and the proliferation of zombie firms: evidence from China

Projects

NSFC: Asset-stranding Risks of Energy Firms under the Carbon Neutrality Goals and Spillover Effects on the Capital Market in mainland China and Hong Kong

Cite this