Zombie problem: Normal firms’ wastewater pollution

Abstract

Many studies have verified that zombie firms have serious negative effects in the economic field, but it is unclear whether those effects will extend to the environmental field. Based on China's firm-level data, this paper investigated the impact and mechanisms of zombies on wastewater discharge behavior by normal firms. The empirical study showed that the higher the proportion of zombies in a province is, the greater is the wastewater discharge by normal firms, which proves that zombies also have serious negative effects in the environmental field. The first mechanism is tax burden, which means that an increase in the proportion of zombies will induce the local governments to raise the actual tax rate on normal firms, which will worsen their financial situation and prompt them to increase wastewater discharge. The second one is institution quality, which means that the higher the proportion of zombies in a province is, the worse is the institution quality. In a low-level institutional environment, it is difficult to form effective governance on pollution. The last one is regulation power, which means that the higher the proportion of zombies is, the stronger is the incentive for local government officials to pursue GDP by relaxing environmental regulations. The contribution of this study is an extension of the research on zombies to the environmental field, which is significant to the in-depth understanding of the widespread, global problem of zombies. This study provides an important idea for countries committed to environmental protection. In addition to direct channels such as environmental regulation, indirect channels such as reducing unreasonable government intervention, speeding up the clearance of inferior firms, and creating a healthy market environment are also of enormous importance.