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

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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.

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Notes

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

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

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

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

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

  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

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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.

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Authors and Affiliations

  1. Edward School of Business, University of Saskatchewan, Saskatoon, SK, Canada

    Min Maung & Craig Wilson

  2. School of Business Administration, Zhejiang Gongshang University, Hangzhou, 310018, China

    Xiaobo Tang

  3. International Business Department, Zhejiang Financial College, Hangzhou, 310018, China

    Xiaobo Tang

  4. Asper School of Business, University of Manitoba, Winnipeg, MB, Canada

    Xiaobo Tang

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  1. Min Maung
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  2. Craig Wilson
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  3. Xiaobo Tang
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Correspondence to Xiaobo Tang.

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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

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