Do air pollution levels influence enforcement by regulators? Evidence from China

Abstract

This paper examines the relationship between air pollution levels and regulators’ enforcement levels and observes that air pollution levels in firms’ locations reduce enforcement from regulators. Moreover, regulators are more likely to suffer from type II errors when air pollution levels in firms’ locations are higher, verifying the effect of regulators’ unwillingness to travel due to air pollution. The cross-sectional analysis suggests that enforcement from regulatory authorities in areas with lower air pollution levels than in firms’ locations, positioned at great distances from firms’ locations, and with greater workloads is less strict when air pollution levels in firms’ locations are higher. We further test whether air pollution levels reduce the efficiency of regulators and find that firms with lower earnings quality and weaker corporate governance are less likely to be subjected to enforcement by regulators when air pollution levels in the firms’ locations are higher.