Abstract
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.
Highlights
Introduction published maps and institutional affilEnvironmental penalty has generated invaluable insights into how government to effectively control the environmental pollution of enterprises
The results indicate that stock market reaction to the environmental penalty is negative and significant on the first day after the announcement of punishment, but the negative impact gradually dissipated on the following day
The results show that the market reacts positively to announcements of the Corporate Environmental Initiatives (CEIs) through revenue gains and market reacts positively to announcements of environmental Awards and Certifications (EACs) through cost reduction based on signal theory [4]
Summary
Environmental penalty has generated invaluable insights into how government to effectively control the environmental pollution of enterprises. Environmental penalty is critical tools for the government to effectively control environmental pollution because of their enforceability and operability [1]. Enterprises are more likely to invest in green initiatives and avoid punishment if they believe that these penalties make their shareholder wealth suffer huge losses. The lack of a significant negative impact of environmental penalty on stock market reaction is likely to suppress firm efforts and hold back environmental strategy toward a sustainable future [2–4]. The increasing importance of environmental penalty among pollution control practices is receiving considerable attention in academic researches [5]. A growing literature studies the reasons why government engage in environmental penalty and how it relates to shareholder wealth.
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