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The Interplay Between Private and Public Regulations: Evidence from ISO 14001 Adoption Among Chinese Firms

Abstract

Extant studies on private regulation have not reached a sufficient understanding about the interplay between private and public regulations, due to underdeveloped theoretical framework and the lack of large-sample empirical investigations. Leveraging ISO 14001 adoption among Chinese firms as the research context, the current research draws on the institutional theory to examine how firm’s adoption of ISO 14001 standard, as a specific form of private regulation, affects the incidence of public environmental inspections. To test our arguments, we conduct two empirical studies. Study 1 uses the first-hand data of a corporate social responsibility survey on Chinese manufacturing firms, whereas Study 2 deploys the second-hand longitudinal archival data of the government environmental inspections on Chinese listed firms. Both of the two studies reveal consistent findings that ISO 14001 adoption decreases the incidence of government environmental inspections, and that the effect of ISO 14001 adoption becomes stronger in state-owned enterprises and firms with top management team’s political ties. Our findings are suggestive of a complementary relationship between private and public regulations, in a sense that private regulations can compensate for the weaknesses of public regulations by offering faster, more flexible and cost-efficient means of enforcement, which allows the public authorities to economize on the deployment of public resources to monitor the rest non-compliant firms.

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Fig. 1

Notes

  1. 1.

    To address the randomness of the sampled firms in the CSR survey, we compared the summary statistics of two datasets and found that the CSR survey had a similar pattern to the firms in the industrial census data in terms of its mean and standard deviation of key variables, such as ROA, ROE, ROS, cost, sales, output, value added, asset, and number of employees.

  2. 2.

    The 12 sampled cities were distributed among coastal, central and western regions. According to the per-capita GDP of 2005, these 12 cities were grouped into three categories: high, middle and low-income. The income gap was roughly two-fold between any two neighboring groups.

  3. 3.

    Since firms of Hong Kong, Macau, and Taiwan (HMT) ownership only took up a small fraction, we categorized them into foreign owned.

  4. 4.

    Usually, the statistical power is determined by sample size, while the P-values usually say less about the magnitude of the effect.

  5. 5.

    Raising the similarity threshold to 0.91 would lead to a surge of false negatives to over 2% in some rounds of trial matching, which we deemed not acceptable. As commonly found in the field of name matching, the likelihood of false negatives did not rise linearly with the threshold value.

  6. 6.

    CSMAR is a well-recognized data vendor of data for the Chinese listed firms. Products of CSMAR are available in the Wharton Research Data Services (WRDS)

Abbreviations

ATT:

Average effect of treatment on the treated

CCER:

China Center for Economic Research

CFA:

Confirmatory factor analysis

CMV:

Common method variance

CPPCC:

The Chinese People’s Political Consultative Conference

CSR:

Corporate social responsibility

EPB:

Environmental Protection Bureau

ISO:

International Standardization Organization

PC:

People’s Congress

PSM:

Propensity score matching

SOE:

State-owned enterprises

TMT:

Top management team

2SLS:

Two-stage least square

VIF:

Variance inflation factor

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Acknowledgments

We are grateful to Jiangyong Lu, Chong Liu, and seminar participants at the 2014 International Association for Chinese Management Research (IACMR) Conference for helpful comments. This research is supported by “the Fundamental Research Funds for the Central Universities” in UIBE (CXTD7-03).

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Correspondence to Wenlong He.

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He, W., Yang, W. & Choi, Sj. The Interplay Between Private and Public Regulations: Evidence from ISO 14001 Adoption Among Chinese Firms. J Bus Ethics 152, 477–497 (2018). https://doi.org/10.1007/s10551-016-3280-x

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Keywords

  • Private regulation
  • Institutional theory
  • ISO 14001
  • Political connections