Environmental Violations and Stock Price Crash Risk: Evidence from Chinese Listed Heavily Polluting Companies

ABSTRACT

This paper examines the relationship between environmental violations and stock price crash risk, using the sample of Chinese A-shared listed firms and a comprehensive range of Chinese listed heavily polluting companies covering 2012 to 2021. We provide strong and robust evidence that environmental violations significantly increase future stock price crash risk for Chinese listed heavily polluting companies. Through the mechanism of internal control, our paper finds that environmental violations lead to the weakening of internal control, thereby exacerbating future stock price crash risk. We further find that the legal environment has a negatively moderating impact on the relationship. Additionally, heterogeneity analysis shows that the influence of environmental violations on stock price crash risk is more prominent when firms are smaller, have non-state ownership, and have a lower level of corporate governance and external monitoring.

KEYWORDS:

• Environmental violations
• stock price crash risk
• legal environment
• agency theory
• information asymmetry

JEL:

• G32
• M14
• M48

Acknowledgments

Dr. Kai Xing would like to acknowledge the financial report provided by the National Natural Science Foundation of China (72201120) and the Natural Science Foundation of Jiangxi, China (20232BAB201027).

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The work was supported by the National Natural Science Foundation of China [72201120]; Natural Science Foundation of Jiangxi Province [20232BAB201027].