The Deterrence Effect of a Penalty for Environmental Violation

Yun Wang, Yanxi Li, Zhuang Ma and Jinbo Song
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Yun Wang: School of Economics and Management, Dalian University of Technology, Dalian 116024, China
Yanxi Li: School of Economics and Management, Dalian University of Technology, Dalian 116024, China
Zhuang Ma: School of Accounting, Hangzhou Dianzi University, Hangzhou 310018, China
Jinbo Song: School of Economics and Management, Dalian University of Technology, Dalian 116024, China

Sustainability, 2019, vol. 11, issue 15, 1-19

Abstract: The response to the penalty for an environmental violation on the firm level is a matter of reactive corporate environmental practices, about which the existence of a penalty is critical for environmental public policy. We propose that a penalty acts as a deterrence signal to enhance the perceived threat of legal punishment and the peer effect serves as the path through which peer firms learn from target firms. Based on the peer effect among firms and the deterrence effect in criminal economics, we investigated whether and how the peer firm responds to the penalty for environmental violation of target firms in the same industrial sector. Using samples of Chinese listed firms from 2008 to 2015, this paper finds that the penalty for the target firms can increase the peer firms’ environmental investment, and compared to the sample with low-level environmental regulation, the increase in the sample with high-level environmental regulation is more significant. These findings suggest that a penalty for target firms has a deterrence effect on peer firms and the environmental regulation strengthens the above deterrence effect. This is expected to help both theorists and practitioners achieve a better understanding of the implementation of a penalty for an environmental violation.

Keywords: penalty for environmental violation; deterrence effect; environmental investment; peer effect (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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