Abstract
After 40 years of economic ascendancy, China’s environmental challenges and public awareness of them have swelled substantially. Both concern mutual funds that invest in publicly traded Chinese firms, many of which have shown questionable environmental responsibility. This study investigates whether mutual fund ownership of Chinese corporations influences firms’ disclosures of environmental responsibility by empirical methodologies. Annual data for 25,188 firm-year observations of corporations trading as A-shares in Shanghai and Shenzhen from 2007–2019 revealed that ownership by mutual funds, and especially by leading funds, correlates strongly and positively with environmental disclosures. These results imply that mutual funds were activist investors that influenced sampled firms to disclose their environmental responsibility during the period 2007–2019. We also examine environmental reporting and mutual fund stock ownership in relation to security analyst coverage, whether sampled firms are government-owned, and periods before and after the implementation of China’s New Environmental Protection Law. Results are heterogeneous with respect to all three considerations. Our findings are significant for regulators, investors, and corporate managers.
Highlights
In recent years, Chinese companies have committed a series of environmentally damaging acts, including water pollution by Zijin Mining, illegal disposal of hazardous waste by Bohui Study, and ubiquitous dumping of sludge by other companies
Following Huang and Kung [47] and D’Amico et al [48], we include as control variables the market value of the sampled companies (Size), financial leverage (Lev), return on assets (Roa), losses (Loss), income growth rate (Growth), dual role (Dual), holdings by the largest shareholder (Top1), number of directors (Board), the proportion of independent directors (Indep), company age (Age), dividends (Div), stock liquidity (Liquid), book-tomarket ratio (BTM), year, industry, and other factors
The greater the proportion of outstanding stock held by institutional investors, such as mutual funds, the more environmental information they disclosed during the period 2007–2019
Summary
Chinese companies have committed a series of environmentally damaging acts, including water pollution by Zijin Mining, illegal disposal of hazardous waste by Bohui Study, and ubiquitous dumping of sludge by other companies. 2012 to June 2020, reports show 19,770 infractions of social and corporate governance involving 1293 listed Chinese companies, of which 8447 (43%) entailed environmental damage These infractions occasioned losses to investors, notably mutual funds that held their stocks. Research has examined mutual funds as monitoring and governance entities, no prior study correlates A-listed Chinese firms’ disclosure of environmental responsibility with mutual fund ownership of their stock. Based on 25,188 annual firm-year observations of A-share listed companies on two Chinese stock exchanges from 2007 to 2019, we find that the larger the proportion of a firm’s outstanding shares held by mutual funds, the greater is a firms’ motivation to report their environmental responsibility. This study makes two contributions to the literature It adds to the understanding of factors that underlie corporate disclosure of environmental responsibility.
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