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| The Spillover Effects of Environmental Punishment on Firm-level Productivity |
| WANG Zhengwei, ZHU Yizhe, ZHANG Hong
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| PBC School of Finance, Tsinghua University |
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Abstract China is vigorously promoting the development of ecological civilization, leading to sweeping, historic, and comprehensive advances in ecological and environmental protection. The effective application of environmental regulation policy tools, such as environmental punishment, supports the modernization of the ecological system and governance capabilities.
Against this backdrop, the spillover effects of environmental penalties on corporate productivity have substantial and significant academic and normative implications. Examining these spillover effects of environmental penalties enables us to enhance the research framework regarding the impact of these penalties on businesses and add new empirical evidence to the literature on environmental regulation. However, only a small proportion of enterprises are actually penalized; therefore, focusing solely on their responses may lead to underestimation of the effectiveness of the underlying environmental policies. Therefore, a better understanding of these spillover effects can shed light on the comprehensive outcomes of China's environmental penalties, thereby improving the regulatory efficiency of environmental policies in practice.
To examine the spillover effects of environmental penalties on non-penalized peer firms within the same city and same industry as penalized firms, we obtain firm-level environmental penalty data from QuantData and focus on the complete sample of A-share mainboard-listed companies in China. We further estimate the total factor productivity (TFP) of peer firms using the Olley-Pakes (OP) method and measure the intensity of environmental penalties by the number of penalized companies. Our baseline results show that environmental penalties reduce the productivity of non-penalized peer firms, and this effect is both statistically significant and economically sizable.
We further explore the economic mechanisms of our main findings by delving into the pivotal role played by green innovation. Increased environmental punishment pressure provides non-penalized peer firms with incentives to engage in green innovation to improve their environmental performance. However, green innovation may not be profitable in the short term. Rather, it may crowd out other profitable and productive firm activities, leading to a decline in firm-level profitability and productivity.
To examine the above mechanism, we use the number of green patent applications as a proxy for incentives to engage in green innovation. In line with this hypothesized mechanism, we find that environmental punishment significantly increases the green innovation incentives of non-penalized peer firms, and that its negative spillover impact on productivity is mainly concentrated in firms pursuing green innovation. Additional analysis reveals two important aspects of this mechanism. First, firms face considerable uncertainty when translating green patents into tangible benefits. Second, an in-depth examination of firms' input-output data confirms that green innovation may crowd out other productive and profitable activities. Taken together, these findings suggest that the crowding-out effect of green innovation elucidates how environmental punishment has a negative spillover impact on productivity.
The marginal contributions of this paper are threefold. First, we introduce a new dataset of environmental penalties collected from the official websites of various government departments using QuantData. The authoritative sources, extensive timespan, and comprehensive coverage enable us to effectively avoid sample selection bias. Second, the focus on non-penalized firms provides a novel perspective and a more comprehensive framework, thus broadening our understanding of the policy impact of environmental penalties. Third, our results suggest that environmental policies may affect the productivity of non-penalized peer firms via the channel of green innovation. Collectively, our main findings and the proposed economic mechanism provide new insights into how environmental regulations influence firm policies and performance.
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Received: 12 December 2022
Published: 17 July 2024
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