Environmental engagement, business operation and corporate policies

<p dir="ltr">Climate change presents a significant challenge to business operations, introducing both physical risk and transition risk. To mitigate these risks and achieve environmental goals, corporations engage in environmental activities designed to protect environment and cater to stakeholders. However, the impacts of such environmental investments on business risks and market values remain controversial, forming the core theme of this thesis. To address these issues, this thesis explores three key aspects organized as follows.</p><p dir="ltr">Chapter 2 focuses on the impact of environmental engagement on lawsuits related to environmental violations. The purpose of this chapter is to explore the impact of socially responsible behaviours on business litigation risks, and specifically, whether engagement in environmental activities can effectively reduce exposure to environmental litigation risks. The empirical analysis shows that environmental engagement can reduce the likelihood of environmental lawsuits, and this effect is robust when considering the potential endogeneity issues. Further analysis shows that improved environmental performance is the key channel through which environmental engagement reduces environmental lawsuits. The heterogeneity analysis indicates that the negative impact of environmental engagement on environmental lawsuit risk is more significant for non-SOEs, firms from high-pollution industries, firms located in high-pollution provinces and low trust provinces. These results clearly demonstrate that environmental engagement can satisfy the stakeholders’ requirement for social responsibility, and thereby leads to low litigation risks.</p><p dir="ltr">Chapter 3 examines the effect of environmental engagement on financial risks, reflected by the bank loan access. The results show that banks are likely to extend credits to firms that invest more in environmental protection activities, although this effect is observed only for short-term loans. The primary reason is attributed to the agency problem, where bank managers, concerned about the bank performance, prefer to grant short-term loans that allow them to closely monitor the borrowers’ financial risks. The channel analysis reveals that improved social trust and reduced financial risks are two key mechanisms through which environmental investment can lead to more bank loans. Further analysis shows that the impact of environmental investment on bank loan access is stronger for non-SOEs and firms with lower ESG rating. This chapter highlights the necessity of establishing a theoretical framework combining stakeholder theory and agency theory to develop more in-depth predictions, aiming to understand how and when environmental engagement can have a meaningful impact.</p><p dir="ltr">Chapter 4 investigates the impact of environmental investment on market values, by examining the announcements of accounting frauds. Extant literature has shown that alleged frauds result in large loss of market value, due to the disruption of investor confidence and trust. This chapter thus aims to explore whether environmental engagement can restore market reputation and rectify the biased business strategy. Empirical results show that firms increase their environmental engagement following the announcements of frauds, and these environmental engagement activities are effective in improving the stock returns. However, such efforts do not meaningfully alter the opinions of informed market participants, including institutional investors, analysts and auditors. While firms could choose to improve the internal corporate governance to restore the market value, this is not observed in Chinese capital market. This chapter highlights the information asymmetry between informed investors and public investors who are lack of inside information, which leads to biased investment decisions.</p>