The impact of penalties for environmental violations on corporate environmental responsibility

Identifying firms’ responses to the imposition of penalties for environmental violations in the context of corporate environmental responsibility (CER) is important to understand the impact of environmental penalties and improve their design. Using a research sample consisting of Chinese listed firms in heavy polluting sectors from 2014 to 2020, we investigate whether and how penalties for environmental violations can affect subsequent CER engagement. The empirical results show that imposing one or more environmental penalties on a firm has positive effects on the firm’s subsequent CER practices. Our results remain robust after a series of tests. We also find that the role of environmental penalties in promoting CER is more pronounced in firms that receive more media coverage, have weak political connections, and operate in less competitive industries. Further analysis shows that the dynamic effect of environmental penalties on CER engagement persists at least two years after the imposition of the penalty and that environmental penalties can stimulate CER practices through both symbolic and substantive actions.