Polluted IPOs

Abstract

This study examines how the negative impact of air pollution on regulatory decision-making can lead to unexpectedly capital-raising outcomes for firms. Chinese companies must undergo a review by a regulator-appointed committee before proceeding with initial public offerings (IPOs). We find that firms are more likely to pass this review on polluted days (i.e., days with higher PM2.5 levels), likely due to reduced cognitive capacity among reviewers, as reflected in fewer and simpler questions raised during the review. Firms approved on polluted days show no significant performance difference from other firms within three years after the IPO. Politically unconnected firms, which are typically less likely to gain approval, see an increased chance of passing on these polluted days. The evidence suggests that the adverse effects of air pollution on high-stakes decision-makers may paradoxically help offset distortions tied to a politically influenced system.

Keywords: Air Pollution, PM2.5, IPO, Regulatory Oversight, Cognitive Ability

JEL Classification: G18, G41, D91, Q5