Environmental litigation reform and firms’ environmental disclosures

Abstract

By exploiting the staggered city-level establishment of specialized environmental courts in China as exogenous shocks and using a difference-in-differences research design, we study the effect of environmental litigation risk on corporate environmental disclosure. We find that firms in the polluting industries significantly increase their disclosure of environmental information relatively to firms in the non-polluting industries, after the city where the corporate headquarters locate sets up environmental courts. The effect of environmental court establishment on environment disclosure is conditional on the quality of legal environment, public scrutiny, political connection, and financial constraints. The channel tests show that environmental courts establishment is associated with increase in corporate environmental litigation penalties and in media and analyst attention, consistent with the argument that environmental courts lead to higher litigation risk. Collectively, our findings suggest that higher environmental litigation risk incentivizes firms to issue more environmental disclosures to reduce the propensity of subsequent stakeholder lawsuits.

Keywords: Environmental Court, Litigation Risk, Environmental Disclosure, Environmental Enforcement, Pollution, China

JEL Classification: G12, G31, M40