Abstract
The response to the penalty for an environmental violation on the firm level is a matter of reactive corporate environmental practices, about which the existence of a penalty is critical for environmental public policy. We propose that a penalty acts as a deterrence signal to enhance the perceived threat of legal punishment and the peer effect serves as the path through which peer firms learn from target firms. Based on the peer effect among firms and the deterrence effect in criminal economics, we investigated whether and how the peer firm responds to the penalty for environmental violation of target firms in the same industrial sector. Using samples of Chinese listed firms from 2008 to 2015, this paper finds that the penalty for the target firms can increase the peer firms’ environmental investment, and compared to the sample with low-level environmental regulation, the increase in the sample with high-level environmental regulation is more significant. These findings suggest that a penalty for target firms has a deterrence effect on peer firms and the environmental regulation strengthens the above deterrence effect. This is expected to help both theorists and practitioners achieve a better understanding of the implementation of a penalty for an environmental violation.
Highlights
While firms in developed countries are taking a proactive sustainability strategy by integrating sustainability into business strategy in pursuit of sustainable growth [1], the firms in emerging countries are taking reactive corporate environmental practices to deal with environmental regulation [2,3,4]
Considering that the penalized firm may respond to the penalties by improving its environmental investment, and in order to only study the deterrence effect of the penalized target firms on the peer firms, peer firms are distinguished from target firms
From the summary statistics of state and heavy pollution industry (HP), we find that there are more state-owned firms and heavy-polluted firms involved in environmental investment
Summary
While firms in developed countries are taking a proactive sustainability strategy by integrating sustainability into business strategy in pursuit of sustainable growth [1], the firms in emerging countries are taking reactive corporate environmental practices to deal with environmental regulation [2,3,4]. In most developing and transition countries, the government is an important driver of corporate environmental practices, and the existence of the penalty is critical for environmental public policy [5]. According to the extant literature, if the penalty for environmental violation is high enough to outweigh the cost of compliance, the profit maximizing firms will intend to comply [2]. To deal with this, maximizing the deterrence on the violator or its future violation and on the potential violator could provide a better solution, which is worth investigating
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