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Does air pollution change a firm's business strategy for employing capital and labor?

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  • Baohua Liu
  • Junfeng Wu
  • Kam C. Chan

Abstract

We examine the impact of air pollution on a firm's capital‐labor ratio. We propose the hypothesis that, in dealing with air pollution, a firm responds strategically by using relatively more capital and less labor to contain labor costs and remain competitive in the market. Using a sample of Chinese firms and a satellite‐based air pollution metric, we test this hypothesis, and our results confirm it. In addition, we document that the impact of air pollution on the capital‐labor ratio is more salient for firms with high economic incentives and close monitoring. Further, we report that to respond to worsening air pollution, a firm uses more capital and substitutes lower‐quality labor with more high‐quality labor. Finally, after increasing the capital‐labor ratio, a firm's value increases, in terms of Tobin's Q, suggesting that the adoption of a higher capital‐labor ratio, due to air pollution, is a sound business strategy.

Suggested Citation

  • Baohua Liu & Junfeng Wu & Kam C. Chan, 2021. "Does air pollution change a firm's business strategy for employing capital and labor?," Business Strategy and the Environment, Wiley Blackwell, vol. 30(8), pages 3671-3685, December.
    • Handle: RePEc:bla:bstrat:v:30:y:2021:i:8:p:3671-3685
    DOI: 10.1002/bse.2833
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    Cited by:

    1. Jianhua Tan & Kam C. Chan & Yining Chen, 2022. "The impact of air pollution on the cost of debt financing: Evidence from the bond market," Business Strategy and the Environment, Wiley Blackwell, vol. 31(1), pages 464-482, January.
    2. Jun Zhang & Jiangquan Wang & Linling Zhang & Lei Zhao, 2022. "Impact of industrialization on China’s regional energy security in the New Era," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 24(6), pages 8418-8440, June.
    3. Wu, Junfeng & Liu, Baohua & Chang, Samuel & Chan, Kam C., 2022. "Effects of air pollution on accounting conservatism," International Review of Financial Analysis, Elsevier, vol. 84(C).

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