Environmental Violations in China: Evaluating Their Long-Term Impact and Predicting Future Violations

47 Pages Posted: 17 Aug 2018 Last revised: 7 Sep 2021

See all articles by Chris Lo

Chris Lo

Hong Kong Polytechnic University

Christopher S. Tang

University of California, Los Angeles (UCLA) - Decisions, Operations, and Technology Management (DOTM) Area

Yi Zhou

Monash University - Department of Management

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

Lo, Chris K. Y. and Tang, Christopher S. and Zhou, Yi, Environmental Violations in China: Evaluating Their Long-Term Impact and Predicting Future Violations (September 6, 2021). Available at SSRN: https://ssrn.com/abstract=3226286 or http://dx.doi.org/10.2139/ssrn.3226286

Chris K. Y. Lo (Contact Author)

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

Christopher S. Tang

University of California, Los Angeles (UCLA) - Decisions, Operations, and Technology Management (DOTM) Area ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://www.anderson.ucla.edu/x980.xml

Yi Zhou

Monash University - Department of Management ( email )

900 Dandenong Rd
Caulfield East, Victoria 3145
Australia

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