Air Quality and Executive Compensation: Evidence from a Spatial Discontinuity in China

Kaixia Zhang, Caiqi Bu and Weibing Li

Emerging Markets Finance and Trade, 2025, vol. 61, issue 8, 2401-2426

Abstract: This paper takes advantage of the spatial discontinuity of air pollution caused by the Huai River policy to effectively isolate the causal relationship between air pollution and corporate executive compensation through a geographical regression discontinuity (RD) design model for the first time. We find that air pollution has a significant positive effect on general manager (GM) compensation. Air pollution results in a higher pay premium for executives with greater bargaining power, nonlocal executives, and those in high economic growth areas. The ordinary employee does not receive an air pollution allowance. In addition, we find that air pollution increases executives’ turnover rates, which threatens companies in highly polluted areas and forces them to increase executive compensation. The conclusions of this paper can help the government, companies, and the public fully understand the economic and social cost issues caused by air pollution.

Date: 2025
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DOI: 10.1080/1540496X.2025.2454419

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