Political Connections and Industrial Pollution: Evidence Based on State Ownership and Environmental Levies in China

Abstract

We investigate how state involvement in the ownership of non-listed entrepreneurial firms affects pollution fees levied by national and provincial governments in China (environmental levies). While the national government sets minimum environmental standards, provincial governments can enact requirements that exceed these minimums, and they are largely responsible for enforcing even the national standards, so environmental levies can measure concessions that provinces make to encourage development and employment. Furthermore, state ownership is a good proxy for a firm’s political connections, which can influence the relationship between the firm and the environmental authorities. We find that firms with state ownership pay lower environmental levies, which indicates that concessions are made for political or economic purposes. However, these concessions are conditional on the level of development of the province offering them, with better developed provinces providing fewer concessions.

This is a preview of subscription content, log in to check access.

Notes

  1. 1.

    Ownership is generally categorized as state-owned enterprises (SOEs), collectively or community-owned enterprises (COEs), privately owned enterprises (POEs), foreign direct investment (FDI) companies, and joint ventures (JVs). An SOE is either fully owned by the state or mostly owned by the state with little minority shareholding.

  2. 2.

    Employees from Chinese SOEs tend to have lower corporate citizenship and environmentalism (Chun, 2009).

  3. 3.

    Ding et al. (2015) show that the political connections maintained by current or ex-government bureaucrats allow such managers to achieve significantly higher compensation from non-SOEs; however, they have no significant difference in compensation from SOEs. This finding illustrates another aspect of the strong bargaining position of SOEs.

  4. 4.

    To our knowledge, 2004 is the only year for which data are available.

  5. 5.

    Although the theory we use for hypothesis development does not require the use of non-listed firms, we expect that the reduction in pollution fees paid for state-owned firms would be greater among non-listed firms. Listed firms have greater disclosure requirements and face greater scrutiny from analysts and market participants. As such, listed state-owned firms may face more pressure to be perceived as behaving similarly to listed non-state-owned firms with respect to their environmental responsibilities. However, Piotroski et al. (2015) document that even listed firms have political incentives to suppress negative information, so the matter may be best treated as an empirical question. We acknowledge this limitation and leave the question of how political connections affect pollution fees for listed firms to future research.

  6. 6.

    We thank Zhenyu Wu for providing the data on this variable.

  7. 7.

    We use the natural logarithm of revenue rather than assets to represent firm size, because the value of assets is used to derive our dependent variable. For instance, ENVLEVY is defined as the value of total pollution fees paid scaled by total assets.

  8. 8.

    For completeness, we also investigate the model without the interaction terms and with various control variables.

  9. 9.

    This dataset reports only those firms that paid environmental levies in 2004, so the minimum levy paid is above zero. The levy paid is above and beyond the taxes paid on corporate income.

  10. 10.

    The dummy variable STATEOWN is used to decompose the sample into state-owned and non-state-owned firms.

  11. 11.

    Note that the correlations between state involvement and provincial development variables range between −0.22 and 0.02, so multicollinearity is not a concern.

Abbreviations

SOE:

State-owned enterprise

GDP:

Gross domestic product

CEO:

Chief executive officer

CNED:

Chinese non-listed enterprise database

References

  1. Bunkanwanicha, P., & Wiwattanakantang, Y. (2009). Big business owners in politics. Review of Financial Studies, 22(6), 2133–2168.

    Article  Google Scholar 

  2. Chaney, P., Faccio, M., & Parsley, D. (2011). The quality of accounting information in politically connected firms. Journal of Accounting and Economics, 51(1), 58–76.

    Article  Google Scholar 

  3. Chang, S., & Xu, D. (2008). Spillovers and competition among foreign and local firms in China. Strategic Management Journal, 29(5), 495–518.

    Article  Google Scholar 

  4. Charumilind, C., Kali, R., & Wiwattanakantang, Y. (2006). Connected lending: Thailand before the financial crisis. Journal of Business, 79(1), 181–217.

    Article  Google Scholar 

  5. Chen, D., Ding, S., & Wu, Z. (2014a). Effect of foreign ownership on cost of borrowing: Evidence from small and medium-sized enterprises in China. International Small Business Journal, 32(6), 693–715.

    Article  Google Scholar 

  6. Chen, Q., Maung, M., Shi, Y., & Wilson, C. (2014b). Foreign direct investment concessions and environmental levies in China. International Review of Financial Analysis, 36, 241–250.

    Article  Google Scholar 

  7. Cheung, Y.L., Jing, L., Rau, P.R., Stouraitis, A., (2005). Guanxi, political connections, and expropriation: The dark side of state ownership in Chinese listed companies. City University of Hong Kong and Purdue University Working Paper.

  8. Chun, R. (2009). Ethical values and environmentalism in China: Comparing employees from state-owned and private firms. Journal of Business Ethics, 84(3), 341–348.

    Article  Google Scholar 

  9. Cull, R., & Xu, L. (2005). Institutions, ownership and finance: The determinants of profit reinvestment among Chinese firms. Journal of Financial Economics, 77(1), 117–146.

    Article  Google Scholar 

  10. Dasgupta, S., Wang, H., and Wheeler, D. (1997). Surviving success: Policy reform and the future of industrial pollution in China. World Bank Policy Research Working Paper Series 1856.

  11. Dean, J., Lovely, M., & Wang, H. (2009). Are foreign investors attracted to weak environmental regulations? Evaluating the evidence from China. Journal of Development Economics, 90(1), 1–13.

    Article  Google Scholar 

  12. Diao, X. D., Zeng, S. X., Tam, C. M., & Tam, V. W. Y. (2009). EKC analysis for studying economic growth and environmental quality: A case study in China. Journal of Cleaner Production, 17(5), 541–548.

    Article  Google Scholar 

  13. Ding, S., Jia, C., Wu, Z., & Yuan, W. (2014). Environmental management under subnational institutional constraints. Journal of Business Ethics. doi:10.1007/s10551-014-2388-0.

  14. Ding, S., Jia, C., Wilson, C., and Wu, Z. (2015). Political connections and agency conflicts: The roles of owner and manager political influence on executive compensation. Review of Quantitative Finance and Accounting, 45(2), 407–434.

  15. Faccio, M. (2006). Politically connected firms. American Economic Review, 96(1), 369–386.

    Article  Google Scholar 

  16. Faccio, M., Masulis, R., & McConnell, J. (2006). Political connections and corporate bailouts. Journal of Finance, 61(6), 2597–2635.

    Article  Google Scholar 

  17. Fan, G., Wang, X., & Zhu, H. (2007a). NERI Index of marketisation for China’s Provinces: 2006 report. Beijing (in Chinese): Economic Science Press.

    Google Scholar 

  18. Fan, J. P. H., Wong, T. J., & Zhang, T. (2007b). Politically connected CEOs, corporate governance and post-IPO performance of China’s newly partially privatized firms. Journal of Financial Economics, 84(2), 265–290.

    Article  Google Scholar 

  19. Fisman, R. (2001). Estimating the value of political connections. American Economic Review, 91(4), 1095–1102.

    Article  Google Scholar 

  20. Geng, X., Yang, X., & Janus, A. (2009). State-owned enterprises in China: Reform dynamics and impacts. In R. Garnaut, L. Song, & W. T. Woo (Eds.), China’s new place in a world in crisis (pp. 155–178). Canberra: ANU E Press.

    Google Scholar 

  21. Jiang, L., Lin, C., & Lin, P. P. (2014). The determinants of pollution levels: Firm-level evidence from Chinese manufacturing. Journal of Comparative Economics, 42(1), 118–142.

    Article  Google Scholar 

  22. Johnson, S., & Mitton, T. (2003). Cronyism and capital controls: Evidence from Malaysia. Journal of Financial Economics, 67(2), 351–382.

    Article  Google Scholar 

  23. Megginson, W. L., & Netter, J. M. (2001). From state to market: A survey of empirical studies on privatization. Journal of Economic Literature, 39(2), 321–389.

    Article  Google Scholar 

  24. Park, S., Li, S., & Tse, D. (2006). Market liberalization and firm performance during China’s economic transition. Journal of International Business Studies, 37(1), 127–147.

    Article  Google Scholar 

  25. Piotroski, J.D., Wong, T.J., and Zhang, T. (2015). Political incentives to suppress negative information: Evidence from Chinese listed firms. Journal of Accounting Research, 53(2), 405–459.

  26. Qin, B. (2013). Political connection and government patronage: Evidence from Chinese manufacturing firms. Stockholm University Working Paper.

  27. Tanaka, S. (2015). Environmental regulations on air pollution in China and their impact on infant mortality. Journal of Health Economics, 42, 90–103.

    Article  Google Scholar 

  28. Walker, K., Ni, N., & Huo, W. (2014). Is the red dragon green? An examination of the antecedents and competitive advantage to environmental proactivity in China. Journal of Business Ethics, 125(1), 27–43.

    Article  Google Scholar 

  29. Wang, H., Bi, J., Wheeler, D., Wang, J., Cao, D., Lu, G., & Wang, Y. (2004). Environmental performance rating and disclosure: China’s green-watch program. Journal of Environmental Management, 71(2), 123–133.

    Article  Google Scholar 

  30. Wang, H., & Jin, Y. H. (2007). Industrial ownership and environmental performance: Evidence from China. Environmental & Resource Economics, 36(3), 255–273.

    Article  Google Scholar 

  31. Wang, H., Mamingi, N., Laplante, B., & Dasgupta, S. (2003). Incomplete enforcement of pollution regulation: Bargaining power of Chinese factories. Environmental & Resource Economics, 24(3), 245–262.

    Article  Google Scholar 

  32. Wang, H., & Wheeler, D. (1996). Pricing industrial pollution in China: An econometric analysis of the levy system, World Bank Policy Research Working Paper 1644.

  33. Wang, H., & Wheeler, D. (2003). Equilibrium pollution and economic development in China. Environment and Development Economics, 8(3), 451–466.

    Article  Google Scholar 

  34. Wang, H., & Wheeler, D. (2005). Financial incentives and endogenous enforcement in China’s pollution levy system. Journal of Environmental Economics and Management, 49(1), 174–196.

    Article  Google Scholar 

  35. Xu, X. D., Zeng, S. X., & Tam, C. M. (2012). Stock market’s reaction to disclosure of environmental violations: evidence from China. Journal of Business Ethics, 107(2), 227–237.

    Article  Google Scholar 

  36. Yang, F., Wilson, C., & Wu, Z. (2014). Investor perceptions of the benefits of political connections: Evidence from China’s A-share premiums. International Journal of Managerial Finance, 10(3), 312–331.

    Article  Google Scholar 

Download references

Acknowledgments

This study was partially supported by Natural Science Foundation of China #71272143 for Tang, and it was done when Tang was a visiting scholar at the University of Manitoba, Canada.

Author information

Affiliations

Authors

Corresponding author

Correspondence to Xiaobo Tang.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Maung, M., Wilson, C. & Tang, X. Political Connections and Industrial Pollution: Evidence Based on State Ownership and Environmental Levies in China. J Bus Ethics 138, 649–659 (2016). https://doi.org/10.1007/s10551-015-2771-5

Download citation

Keywords

  • Political connections
  • Industrial pollution
  • State ownership
  • Environmental levies