Environmental Violations in China: Evaluating Their Long-Term Impact and Predicting Future Violations
47 Pages Posted: 17 Aug 2018 Last revised: 7 Sep 2021
Date Written: September 6, 2021
Abstract
This paper examines two issues arising from environmental violations. First, we examine the impact of (exposed) environmental incidents on a firm’s long-term performance (Return on Assets, Return on Sales, etc.). Second, we develop a predictive model and a “risk” scoring system to characterize the likelihood of a firm violating environmental regulations.
We use various empirical methods to examine our research questions by considering all 1542 environmental incidents committed by 418 public Chinese manufacturers listed on the Shanghai/Shenzhen Stock Exchange from 2004 to 2013. Our empirical analysis yields the following results. First, we find empirical evidence that, compared to control firms, firm with (exposed) environmental incidents have a lower ROA in consecutive years “only after” they were exposed. Second, using our training samples (data from 2004-2012), we develop a predictive model and a “risk” scoring system to characterize the likelihood of a Chinese manufacturer violating environmental regulations in 2013. Specifically, we use publicly available financial data to identify factors (e.g., firm age, total assets, percentage of government ownership, past environmental incidents) to predict which firm is more likely to violate environmental regulations. Using our training samples (data from 2004-2012), we can expose over 71% of the violations in 2013 by inspecting only 21.5% of the firms with risk scores above the top 80 percentile.
Keywords: Environmental Incidents, China, Business Analytics, Social Responsibility
Suggested Citation: Suggested Citation