Abstract
We investigate the impacts of anticipated government environmental audits (GEAs) on firm productivity. We use a 2009 policy set forth by China's National Audit Office that required GEAs of local governments as an exogenous event to examine the effect of the policy announcement on firms’ total factor productivity (TFP). Our difference-in-differences tests indicate that TFP in heavily polluting firms improved more than other firms’ TFP after the announcement of the policy. We also find that to raise TFP, firms engage in green invention patents or receive government environmental subsidies. In addition, our cross-sectional analysis suggests that firms in regions where governments have strong environmental enforcement or that are in the eastern regions of China increase TFP more.
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