Seeing is believing? The impact of air pollution on corporate social responsibility

Abstract

We study the impact of air pollution in the city in which a firm is located on its corporate social responsibility (CSR) activities. Our hypothesis suggests that when managers are personally exposed to bad air pollution, they feel the pain and push their firms to engage in more CSR activities. Leveraging recent announcements regarding air pollution in Chinese cities, we find evidence consistent with our “seeing is believing” hypothesis. The findings are robust to alternative metrics of CSR and air pollution and after accounting for endogeneity. Additional analysis suggests that the impact of air pollution on CSR is more salient for firms with disproportionately older, female, and highly educated managers as well as when the local city government has more stable resources or when media coverage of air pollution increases.

Does air pollution change a firm's business strategy for employing capital and labor?

“…Our study is related to Zhang et al (2019) and Z. Tan et al, (2021), J. Tan et al, (2021), but it differs from them in two ways. First, these studies use executives' risk aversion and sentiments to explain a firm's decisions regarding investments, CSR, and cash holdings.…”

“…Although all kinds of pollution are undesirable, air pollution differs from other types of pollution because of its high mobility and negative externality (Chan, 2021; Z. Tan et al, 2021; Zhang et al, 2020). The adverse effects of air pollution are particularly acute in emerging markets, such as China (Nguyen et al, 2021).…”

“…According to an emerging body of literature, air pollution in the city where a firm is located significantly affects the firm's business strategy (Z. Tan et al, 2021, J. Tan et al, 2021; Zhang et al, 2019). These studies on business strategies and air pollution focus on the levels of corporate investment, corporate social responsibility (CSR), and cash holdings.…”

Air pollution and CEO compensation: Evidence from China

“…Comparably, workers handle‐less daily calls when the air pollution index climbs (Chang et al, 2019). In terms of corporate behavior, Tan et al (2021) and Wang et al (2021) document that a worsened air pollution significantly increases a firm's corporate social responsibility activities. Tan et al (2021) attribute their findings to the personal exposure of managers.…”

“…In terms of corporate behavior, Tan et al (2021) and Wang et al (2021) document that a worsened air pollution significantly increases a firm's corporate social responsibility activities. Tan et al (2021) attribute their findings to the personal exposure of managers. Thus, air pollution has a natural effect on managerial behavior.…”