Political connections, environmental violations and punishment: Evidence from heavily polluting firms

Chris Florackis, Xi Fu and Jingjing Wang

International Review of Financial Analysis, 2023, vol. 88, issue C

Abstract: Using hand-collected data on violations of environmental regulations by heavily polluting firms in China, we examine the relationship between political connections and the probability of punishment for breach of such regulations. To this end, we exploit a regulatory reform, the enactment of Rule 18, a key component of China's anti-corruption campaign, which required politically connected independent directors to resign from their positions. Using difference-in-differences specifications, we find that firms from which politically connected directors resigned due to Rule 18 experience a significant increase in both the likelihood of ever being punished for environment-related violations and the frequency of punishment. The effect of Rule 18 is more pronounced among firms located in regions with less efficient judicial systems and higher levels of corruption, as well as firms that are not state-owned. Our evidence indicates that in the absence of effective regulation, political connections can be costly to the environment as they strongly affect the enforcement of environmental regulations.

Keywords: Political connections; Independent directors; Corporate environmental punishment; Judicial efficiency; Local corruption culture (search for similar items in EconPapers)
JEL-codes: G30 G38 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:88:y:2023:i:c:s1057521923002144

DOI: 10.1016/j.irfa.2023.102698

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