Study On The Relationship Between Corporate Relative Performance And Corporate Pollution Practices

Considering of the serious environmental pollution and the limitations of the external governance such as administrative and legal supervisions in China, we propose a transformative view that turns to the internal governance from the aspect of incentive on top managers to regulate corporate pollution practices. We explore how to incorporate the corporate relative performance evaluation system with the incentive on top managers to regulate corporate environmental pollution. A large sample of exposed events of environmental pollutions conducted by Chinese listed firms provides us a good chance to evaluate the effectiveness of corporate relative performance evaluation system and managerial incentive on corporate environmental pollution. We collect the data of environmental pollution practices of Chinese environmental-intensity industrial listed firms from the year of 2004 to 2012. Applying to the prospect theory, we find that the corporate social relative performance is beneficial for reducing the corporate pollution, and specifically for those firms in which the top managers have political affiliations. However, corporate historical relative performance may deteriorates the corporate pollution. For details, on the one hand, there is a positive relationship between high historical relative performance and the likelihood of corporate environmental pollution, but fixed payment of top managers mitigates this relationship. On the other hand, although there is a negative relationship between the low historical relative performance and corporate environmental pollution, a high fixed payment of top managers still promote corporate practices of environmental pollution. The results indicates that introduction of the corporate social relative performance evaluation and assigning political incentive on top managers as well as signing high fixed payment of top managers when corporation having a high historical relative performance would sufficiently forestall the propensity of corporate environmental pollutions. We make the following proposals. Firstly, listed firms especially emphasize the importance of corporate historical relative performance evaluation system and require managers to increasingly enhance performance whereas this evaluation system will result in more corporate pollution practices. Thus, we suggest that the corporate social relative performance evaluation system should be introduced and applied to motivate firms to learn from their peers, to heighten the core competence, to boost their status in industries instead of implementing opportunism behaviors in order to enhance short-term performance. Then corporate pollution practices will be restricted effectively. Secondly, the effect of corporate social relative performance will be better if managers are granted political identities. Thirdly, in the case of designing incentive contract for managers, listed firms should shift their previous view which emphasize the positive effect of managers' pay on corporate financial performance to pay more attention on effect of fixed payment on controlling for corporate pollution practices.