Does non‐compliance pay? Environmental violations and share prices in China

Abstract This study investigates how environmental penalties affect the share prices of Chinese listed companies. By linking the share prices of listed firms to the full administrative environmental penalty records from 2015 to 2020, market reactions to 3602 environmental violations measured by cumulative abnormal return ( CAR ) are studied. We find that after an environmental penalty, the share price of the violator would decline significantly, but with a small magnitude in general. Our results provide empirical evidence that companies are paying some extra costs in the stock market for their environmental noncompliance in China, especially for environmental penalties with large fines, business bans, or those issued by high‐level governments. Also, large, state‐owned, and key emission unit companies are found to be less affected.