Environmental effects of foreign indirect investment: The information channel

Pingyi Lou and Chenyu Wu

Journal of International Money and Finance, 2024, vol. 144, issue C

Abstract: We investigate the environmental consequences of foreign indirect investment in China. By exploring the implementation of the Shanghai-Hong Kong Stock Connect program, which induced a positive shock to foreign indirect investment, we find that connected firms reduced their commitment to environmental responsibility more than unconnected firms. We document evidence that this can be attributed to the switch from accrual-based earnings management to real earnings management when the information environment improves after the shock. This effect is more pronounced for firms that face weak environmental regulation and low social norm costs, which amplify the unintended consequences of the information channel of stock market liberalization in developing countries.

Keywords: Environmental performance; Foreign indirect investment; Capital market liberalization; Information environment; Real earnings management (search for similar items in EconPapers)
JEL-codes: F38 M41 Q53 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:144:y:2024:i:c:s0261560624000585

DOI: 10.1016/j.jimonfin.2024.103071

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