Market Response to Regulatory Costs Related to Haze

Abstract

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 cross-sectional market valuation of regulatory costs. Contrary to research indicating government protection of SOEs (e.g., Berkman, Cole and Fu 2010), we find market expectation of larger haze-related regulatory costs for state-owned firms versus non-state-owned firms. We also find higher expected costs for firms that provide corporate social responsibility reports, firms in high polluting industries, and firms located closely to Beijing. These expected regulatory costs appear to have increased over time, reducing the market valuation of these categories of firms over the longer term. The results are consisted with market expectations of increased government scrutiny regarding pollution.