Air Pollution, Environmental Violation Risk, and the Cost of Debt: Evidence from China

Although a firm’s exposure to air pollution-related risk has become an important factor that creditors cannot ignore in the procedure of lending decision making with the aggravation of air pollution, empirical evidence on whether and how air pollution affects the cost of debt has been relatively scarce. Employing a series of Chinese listed firms from the main board of the Shanghai and Shenzhen Stock Exchanges covering 2014 to 2018, our research responds to this research gap by exploring how air pollution-induced environmental violation risk affects the cost of debt by constructing an assessment system of firms’ environmental violation risk. The results shed light on an issue that firms exposed to higher concentrations of air pollution may suffer a higher environmental violation risk, resulting in a higher debt cost. In addition, a further analysis shows that environmental regulatory pressure and heavily polluting firms enhance the influence of air pollution on the cost of debt, while state-owned firms and firms’ economic contributions weaken the influence of air pollution on the cost of debt. Our research is conducive to highlighting not only the importance of environmental governance for mitigating the cost of debt to the firms exposed to air pollution, but also its importance to creditors exposed to their clients’ environmental violation risk and default risk.

Environmental Penalties, Investor Attention and Stock Market Reaction: Moderating Roles of Air Pollution and Industry Saliency

Despite the importance of environmental penalties in environmental enforcement, how and under what situations they impact stock market reaction is still unclear. Drawing on the theories of expectancy violation and attention driven, a conceptual model is built to explore how environmental penalty influences stock market reaction through investor attention. Furthermore, it is explored that the air pollution and industry saliency facilitate the indirect relationship between environmental penalty and investor attention. We empirically test this theoretical framework using a sample of 88 listed companies that received the environmental penalty. Up to 31 December 2020, a total of 88 A-share listed companies in Shanghai and Shenzhen stock exchanges were obtained as samples by collecting the announcement of environmental penalties of listed companies on Juchao Network. Furthermore Baidu index is taken as a proxy for investor attention in this study. Our findings reveal that investor attention plays mediating role in the relationship between environmental penalty and abnormal returns, while the direct effect of environmental penalty on stock market reaction has not been verified, thus, investor attention plays a complete mediating role between them. In addition, air pollution moderates the relationship between Environmental penalties and investor attention. The study found that enterprises in heavy pollution industries might suffer safety-in-numbers effect, which would weaken the directly negative impact of environmental penalties, and verified the moderating effect of industry saliency. These findings provide theoretical and practical implications for understanding how environmental penalties influence on stock market reaction.