The Impact Of Air Pollution On Chinese Listed Companies

Since the reform and opening up,China’s long-term "extensive" economic development model of high energy consumption and low efficiency has brought serious environmental pollution problems.According to the World Environmental Performance Index released in2020,China’s PM2.5 pollutants and carbon dioxide emissions ranked 120 th out of 180 globally evaluated countries.Severe environmental air pollution not only damages the physical and mental health of residents,but also has a significant negative impact on the supply of social labor and enterprises’ production and operation.Researchers have widely explored the impact of air pollution on residents’ physical and mental health and social economic development,but it still lacks related research in current literature to analyze the impact of air pollution on listed companies from the enterprise managers’ behavior.Managers,as the decision makers of the company,their behavior changes will have even more profound impact on the company.Therefore,this thesis will discuss the impact of air pollution on Chinese listed companies based on the incentive of firms’ senior executives by discussing the role of environmental quality.For executive incentive,the current researches mainly discuss the impact of monetary factors on the management behavior,such as salary incentive or equity incentive,and it lacks discussion of the effects of non-monetary factors on the behavior of managers.This article explores the role of the air pollution in stimulating the firm’s executive incentive.This thesis discusses the impact of air pollution on managers’ behavior and management turnover,and then extends this impact to the firm level.This article adopts the method of geographical regression discontinuity design to tackle the endogenous problem of the impacts of air pollution on firm’s executive turnover rate,firm innovation and stock price crash risk,and the potential influence mechanisms behind the effects.The results show that:First,it is found that air pollution has a significant positive effect on the turnover rate of managers,and this effect is more significant in the voluntary turnover of managers,but not significant in the involuntary turnover of managers.Compared with non-polluted areas,managers who leave companies in polluted areas are more likely to find new jobs in less polluted areas.In the long run,air pollution alters the firm’s management structure.It is found that companies in polluted areas have a lower proportion of educated,young,or overseas experience managers and are less likely to recruit non-local CEOs than those in non-polluted areas.After a series of robustness tests,the results of the basic conclusions remain robust.In mechanism analysis,this thesis has found that the channel of the effects of air pollution on the company’s managers leaving is that the air pollution harm the health of the labor force,and the firm managers’ leaving due to "health reason" is higher in polluted areas.The heavy air pollution causes company managers to "vote with their feet" and leave the heavily polluted area and choose to work in less polluted areas.Cities’ abundant medical resources can mitigate the positive effect of air pollution on the firms’ management turnover.In heterogeneity analysis,this thesis finds that the positive effect of air pollution on the turnover of managers is more significant in non-state-owned firms and firms with lower level of managers’ salary.Second,air pollution has a significant negative impact on corporate innovation(i.e.,the number of patent applications filed by a company),and this impact is mainly concentrated in the number of innovative patent applications.The basic results still remain after conducting several robustness tests.The potential channel behind the negative impact of air pollution on corporate innovation is that air pollution leads to the increase of turnover rate of "talented" managers and the decline of work efficiency,which leads to the decline of corporate innovation ability.In heterogeneity analysis,it is found that the impacts of air pollution on corporate innovation are more significant in non-state-owned companies,companies with lower level of managers wage and companies located in cities with poor medical resources.Third,air pollution has a significantly positive effect on firm’s stock price crash risk,and the results remain consistent after a series of robustness tests.The underlying mechanisms behind the impacts of air pollution on the firm’s stock price crash risk is that the air pollution promotes the replacement of the company’s management,resulting in the firm’s hidden "bad news" revealed,and at the same time management wealth transfer activity leads to the reductions of managers’ stock holdings,which sends the negative signals to the market investors,and leads to the increases of the firm’s stock price crash risk.In heterogeneity analysis,it is found that the positive impact of air pollution on the firm’s stock price crash risk is more significant in companies with lower level of executive compensation,companies located in areas with insufficient medical resources,companies with lower quality of information disclosure and non-state-owned companies.The research results of this thesis have clear policy reference significance.First of all,the research of this thesis provides important policy implications for regulatory authorities to understand the role of air pollution in brain drain,inhibiting corporate innovation,and affecting the stability of financial markets.Local governments should weigh the twin goals of economic growth and environmental pollution control costs and benefit when formulate policies,and shouldn’t blindly pursuing economic benefits and ignore or abandon pollution problem.Therefore,the local government shall guide the local enterprises to carry out the green technology innovation activities,and reduce the negative impact of air pollution on the company.Secondly,local enterprises should jointly improve the environmental quality of their cities through cooperation,mutual supervision,green innovation and self-research,to reduce the harm of air pollutants to the health and work efficiency of their employees.At the same time,the green innovation activities of the enterprise will improve the production efficiency of the company,reduce the production cost and pollution control cost of the company,enhance the international competitiveness of the enterprise,avoid brain drain and attract more international talents.Finally,regulators the financial market should not only establish relevant market mechanisms to improve corporate governance behavior,but also need to formulate related environmental pollution control policy to induce companies to environmentally innovate,such as green credit and the monitoring list of heavy pollution industry and so on,in order to achieve the purpose of reducing the air pollutant emissions of listed companies and alleviate the positive impact of air pollution on the firms’ stock price crash risk.