Contaminated Heart: Does Air Pollution Harm Business Ethics? Evidence from Earnings Manipulation

Charles H. Cho (), Zhongwei Huang (), Siyi Liu () and Daoguang Yang ()
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Charles H. Cho: York University
Zhongwei Huang: City, University of London
Siyi Liu: University of International Business and Economics
Daoguang Yang: University of International Business and Economics

Journal of Business Ethics, 2022, vol. 177, issue 1, No 9, 172 pages

Abstract: Abstract We investigate whether air pollution harms business ethics from the perspective of earnings manipulation, which exerts a real effect on the economy and social welfare. Using a large sample and a comprehensive air quality index in China, we find that firms located in cities with more severe air pollution exhibit higher levels of discretionary accruals and are more likely to restate their financial statements, consistent with exposure to air pollution leading to more earnings manipulation. We further provide causal evidence using propensity score matching and a discontinuity regression design (RDD) exploiting the Qinling Mountain–Huai River Heating Policy Line, which exogenously leads to more air pollution to cities located immediately north of the Line but not those in the south. Our findings are robust to controlling for weather conditions and alternative samples and measures of air pollution and earnings manipulation. Overall, this study unveils how the ecological environment shapes business ethics.

Keywords: Air pollution; Business ethics; Earnings manipulation (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10551-021-04762-y

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