Market response to expected regulatory costs related to haze

• Published in: Journal of accounting and public policy 2017-05, Vol.36 (3), p.201-219
• Main Authors: Li, Chao Kevin, Luo, Jin-hui, Soderstrom, Naomi Siegel
• Format: Article
• Language: English
• Subjects: Air pollution; Air quality; Attention; Companies; CSR disclosure; Expectations; Haze; Industrial development; Industrialization; Outdoor air quality; Polluting industries; Pollution control; Public enterprise; Regulatory costs; Social responsibility; State-Owned Enterprises; Urbanization; Valuation
• ISSN: 0278-4254; 1873-2070
• DOI: 10.1016/j.jaccpubpol.2017.03.002

One of the consequences of rapid industrialization and urbanization of China has been a significant increase in air pollution, frequently at levels that are hazardous to health. On 2 December 2013, pollution reached new levels, with the air quality index crossing the threshold from “very unhealthy” into “hazardous”. We take this exogenous event, along with related increases in outrage and governmental attention, as an opportunity to explore market valuation of expected regulatory costs. Contrary to research indicating government protection of state-owned enterprises (SOEs) (e.g., Berkman et al., 2010), we find evidence supporting market expectations of larger haze-related regulatory costs for SOEs versus non-state-owned enterprises (NSOEs). We also find evidence that the market initially expected firms that provide corporate social responsibility (CSR) reports and firms in high polluting industries would be relatively shielded from higher regulatory costs. However, this changed following increased outrage and government attention to haze, with resulting larger expected regulatory costs. Our evidence is also consistent with initial market expectation that firms located closer to Beijing would be shielded, but this expectation changed over time. Overall, expected regulatory costs appear to have increased over time, reducing the market valuation of SOEs, CSR reporters, and firms in polluting industries over the longer term. Increased occurrence of haze events in other countries (e.g., more recent events in India, Indonesia) will likely result in similar expected increases in regulatory costs. Further, our study underscores the existence of material impacts on firms related to environmental events that are beyond firms’ control.