The Porter hypothesis asserts that properly designed environmental regulation motivates firms to innovate, which ultimately improves profitability. In this study, we test empirically the Porter hypothesis and the competing hypothesis that regulation undermines profitability (“costly regulation...

Previous theoretical research provides opposing arguments regarding the effect of environmental regulation on profitability. This study provides empirical evidence on this debated effect by testing the "strong" version of the Porter hypothesis. We employ panel data analysis to examine the effect...