Author: GangXiao, SichenShen

Abstract:We examine the influence of political connections on firms' environmental performance within the setting of China's Regulation 18, which prohibits government officials from taking business positions. Firms that lost political connections due to Regulation 18 experienced increases in environmental performance. This improvement is mainly driven by the tunneling channel rather than the sheltering channel. Specifically, we decompose the environmental ratings into strengths and concerns, and find the effect is stronger on strengths. The environmental improvements are more pronounced for firms with a higher degree of tunneling, and are value-enhancing. Our findings suggest that political connections impede firms' environmental performance and generate negative externality to the environment.

Key words:Environmental performance，Political connection，Regulation 18，Tunneling，Sheltering

This paper was published online in May 2022 in Journal of Corporate Finance, B+ journals of the School of Economics and Management, Wuhan University.

The paper link:https://www.sciencedirect.com/science/article/pii/S0929119922000578