The impact of penalties for environmental violations on corporate environmental responsibility

Abstract

Identifying firms' responses to the imposition of penalties for environmental violations in the context of corporate environmental responsibility (CER) is important to understand the impact of environmental penalties (EPs) and improve their design.Using a research sample consisting of Chinese listed firms in heavy polluting sectors from 2014 to 2020, we investigate whether and how penalties for environmental violations can affect subsequent CER engagement. The empirical results show that imposing one or more EPs on a firm has positive effects on the firm's subsequent CER practises. Our results remain robust after a series of tests. We also find that the role of EPs in promoting CER is more pronounced in firms that receive more media coverage, have weak political connections, and operate in less competitive industries.Further analysis shows that the dynamic effect of EPs on CER engagement persists at least 2 years after the imposition of the penalty and that EPs can stimulate CER practises through both symbolic and substantive actions.

Administrative penalties and corporate CSR disclosure strategies

“…On the contrary, firms can mitigate the administrative penalties by relying on some informal institutions in the area with a low level of legal institutions, such as political connections with governments (Brahma et al, 2023). The formal system effectively fulfills its regulatory role when firms engage in more severe violations (Li et al, 2022; Warren, 2019). In short, once a firm in a region with a low level of legal institutions is penalized indicates that the firm's violations are serious, leading to the formation of a larger expectancy violation gap, which will more easily raise investor attention and inquiries.…”

Enhancing sustainable development through effective disclosure: Corporate environmental performance and readability

“…Testa et al (2014) find that Italian energy‐intensive corporations were responsive to the international ISO14001 standard, with a reduction in corporate CO 2 emissions and a significant improvement in both short‐ and long‐term environmental performance. Besides, referring to Romero et al (2018) and Li, Ramanathan, and Xu (2022), we also use the number of environmental violations every year as a proxy for corporate environmental performance.…”

Corrupt practice and sustainability reporting: Lifecycle perspective

“…This negative correlation between corruption and sustainability reporting is believed to be uniform across firms' lifecycle stages. Firms in different stages of their lifecycle allocate resources differently (Hasan et al, 2018; Jan et al, 2021; Li et al, 2023). For instance, during the startup and growth phases, resources might be directed towards sustainability reporting as part of a strategic plan to establish a positive corporate image.…”

“…For instance, during the startup and growth phases, resources might be directed towards sustainability reporting as part of a strategic plan to establish a positive corporate image. However, in the shake‐out or decline stages, resource allocation may shift towards addressing immediate financial concerns, leading to reduced investment in sustainability reporting (Li et al, 2023). Furthermore, firms in various stages place varying importance on reputation management.…”