The intra-industry effect of corporate environmental violation: An exploratory study

Abstract

Regenerative sustainability at firm level is a matter of "proactive corporate environmental strategy" to prevent firms from committing environmental misconducts, which not only do harm to the ecological environment but also arouse negative reactions from stakeholders. Drawing on signaling theory, this study explores the intra-industry effect of corporate environmental violations of Chinese listed companies. We propose that the environmental violation announcement carries predominantly negative information regarding rival firms and thus the stock market reacts negatively not only to the firms who commit environmental violations but also to rival firms. Empirical results corroborate the intra-industry contagion effect for rival firms whose cash flow characteristics are similar to those of the violating firm, and also reveal that official disclosure of environmental violations committed by a state-owned enterprise (SOE) inflicts an additional adverse effect on rival SOEs to some extent. Additionally, the intra-industry effect is shown to be more profound in non-environmentally sensitive industries. Finally, the stock market is found to be more sensitive to environmental violations occurring within final goods industries than intermediate goods industries.