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Environmental Management Under Subnational Institutional Constraints

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Abstract

This study uses the institutional perspective to examine the interaction effects between the subnational institutional context and firm-level parameters on corporate environmental behaviors, based on a unique cross-sectional data set of private firms compiled from three different sources in China. Our results suggest that both enforcement stringency of environmental regulations at the provincial-level and private firms’ foreign ownership negatively affect compensation fees, which are levies charged for firms’ emissions. Enforcement stringency also moderates the firm-level relationship between foreign ownership and compensation fees, but such a cross-level moderating effect holds only for private firms with non-HMT (Hong Kong, Macau, or Taiwan) investments.

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Notes

  1. Publicly listed companies in China during our sample period are mostly state-owned enterprises. Such firms may have close political ties to the government, which in turn gives them power and may allow them to behave differently in environmental management.

  2. http://env.people.com.cn/GB/1072/8689536.html.

  3. http://www.zhb.gov.cn/gkml/zj/wj/200910/t20091022_172349.htm.

  4. Foreign ownership involvement may have four different forms: wholly controlled enterprises or units (i.e., 100 % foreign ownership), foreign owners being the controlling shareholders, foreign ownership being non-controlling shareholders, and no foreign ownership at all (i.e., purely domestic firms). Provinces may adopt differential policies toward foreign ownership, depending on the form of foreign involvement. It is not unusual that the higher the foreign ownership, the more preferential treatment, and therefore the more bargaining power. We acknowledge that we did not directly measure bargaining power in our study, but used foreign ownership as a proxy of bargaining power. We thank one anonymous referee for pointing this out. Future studies could use different measures of bargaining power.

  5. Two factors will affect the compensation fee, the pollution released and the local government’s levying stringency. The higher the stringency, the more compensation fee will be levied for same amount of pollution released, and the better the compensation fee as a proxy of pollution attitude. Since our hypothesis is that enforcement stringency of the pollution levy system at the provincial-level is negatively related to compensation fees paid by firms with foreign investments, the data quality will not be a problem. Actually, the negative effect should be higher if we can directly measure pollution attitude.

  6. These two guidelines are The Notice about Further Specifying the Environmental Protection of Companies in Highly Polluting Industries which Apply for IPO or SEO (2007-105) published in 2007, and The Guidelines about Strengthening the Supervision and Administration of Listed Companies’ Environmental Protection (2008-24) published in 2008. These two documents can be retrieved in Chinese at www.mep.gov.cn.

  7. Madsen (2009, p. 1301) points out that “SO2 is one of the most common industrial pollutants.”

  8. It is noteworthy that the raw values are in 10,000 Yuan, instead of 1,000 Yuan.

  9. When we did so, we added a value of 1 to the raw values of environmental fees before taking the natural logarithm. Otherwise, the observations with zero environmental fees paid would have been excluded from the sample.

  10. An alternative hypothesis for Hypothesis 2 is that the higher the foreign shares in the firms, the more ethically they behave and the lower compensation fees they pay. If the negative relationship between foreign ownership and compensation fees is driven by foreign firms’ ethical behavioral orientation rather than their bargaining power, we will expect a different moderating effect of enforcement stringency: ethical behavioral orientation of foreign firms should reduce their compensation fees, but the ethical behavioral orientation–compensation fees relationship may be stronger in environmentally stringent provinces, as firms’ behavioral orientation and enforcement stringency may strengthen their individual impact. Thus, the alternative hypothesis of Hypothesis 2 implies that the moderating effect of enforcement stringency on the relationship between foreign ownership and compensation fees will demonstrate a pattern in the opposite direction to Hypothesis 3. However, our following hypothesis tests suggest that the alternative hypothesis for Hypothesis 2, that ethical behavioral orientation of foreign firms decreases the compensation fees, is not plausible. Although we did not have a formal test for the alternative hypothesis for Hypothesis 2 and we cannot totally rule it out, the above discussion indicates that Hypothesis 2 is more likely than the alternative hypothesis.

  11. Information of model fit statistics is presented in Table 4 in order to help assess the differences between models. The χ 2 likelihood-ratio test is for nested models, and Akaike’s Information Criterion and Schwarz’s Bayesian Criterion are for non-nested models.

  12. The variable AGEFIRM was dropped by SPSS during the estimation.

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Acknowledgments

The research was partially sponsored by the Social Sciences and Humanities Research Council (SSHRC) under Standard Research Grant No. 410-2009-0210 and under Canada Research Chairs Grant No. 950-226325, the Canada Foundation of Innovation (CFI) under Leaders Opportunity Fund No. 226325, and Manitoba Research and Innovation Fund (MRIF) No. 226325 for Wu.

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Correspondence to Zhenyu Wu.

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Ding, S., Jia, C., Wu, Z. et al. Environmental Management Under Subnational Institutional Constraints. J Bus Ethics 134, 631–648 (2016). https://doi.org/10.1007/s10551-014-2388-0

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