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To pollute or not to pollute: Political connections and corporate environmental performance

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  • Xiao, Gang
  • Shen, Sichen

Abstract

We examine the influence of political connections on firms' environmental performance within the setting of China's Regulation 18, which prohibits government officials from taking business positions. Firms that lost political connections due to Regulation 18 experienced increases in environmental performance. This improvement is mainly driven by the tunneling channel rather than the sheltering channel. Specifically, we decompose the environmental ratings into strengths and concerns, and find the effect is stronger on strengths. The environmental improvements are more pronounced for firms with a higher degree of tunneling, and are value-enhancing. Our findings suggest that political connections impede firms' environmental performance and generate negative externality to the environment.

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  • Xiao, Gang & Shen, Sichen, 2022. "To pollute or not to pollute: Political connections and corporate environmental performance," Journal of Corporate Finance, Elsevier, vol. 74(C).
    • Handle: RePEc:eee:corfin:v:74:y:2022:i:c:s0929119922000578
    DOI: 10.1016/j.jcorpfin.2022.102214
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    More about this item

    Keywords

    Environmental performance; Political connection; Regulation 18; Tunneling; Sheltering;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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