Firm Size, Political Connections, and the Value Relevance of Environmental Enforcement in China

38 Pages Posted: 9 May 2019

See all articles by Abdoul G. Sam

Abdoul G. Sam

The Ohio State University

Xiaodong Zhang

Dongbei University of Finance and Economics

Date Written: April 20, 2019

Abstract

Curbing environmental pollution is a key priority in China as reflected in the adoption of policies such as “New Normal” and the takeover of environmental enforcement by the top leadership of the central government in 2015. In this paper, we use a dataset of publicly-traded firms in the Shanghai and Shenzhen stock exchanges and the event study methodology to gauge the reaction of the investor class to the new environmental enforcement regime. Our results indicate that, together, the announcement and implementation of the new enforcement regime spurred a significant decline of over $29 billion in shareholder value of polluting companies, suggesting that capital market participants expect increased regulatory costs for targeted companies. We also find that neither political connections nor firm size mitigated the severity of the market losses. Instead, larger firms and state-owned enterprises with excess capacity experienced bigger declines in market value.

Keywords: environmental enforcement, value relevance, firm size, political connections

JEL Classification: Q51, Q56, G14

Suggested Citation

Sam, Abdoul G. and Zhang, Xiaodong, Firm Size, Political Connections, and the Value Relevance of Environmental Enforcement in China (April 20, 2019). Available at SSRN: https://ssrn.com/abstract=3375205 or http://dx.doi.org/10.2139/ssrn.3375205

Abdoul G. Sam (Contact Author)

The Ohio State University ( email )

238 AG. Administration Building
2120 Fyffe Road
Columbus, OH OH 43210
United States

HOME PAGE: http://aede.osu.edu/our-people/abdoul-sam

Xiaodong Zhang

Dongbei University of Finance and Economics ( email )

China

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