Do Political Connections Weaken the Environmental Protection Mechanism? Evidence from China

ABSTRACT We examine whether, and if so, how, political connections affect pollution penalties for environmental violations among highly polluting firms. Using a unique database of pollution incidents and penalties in China, we find that highly polluting firms with stronger political connections receive fewer pollution penalties. Additional analyses show that the effect of political connections in reducing pollution penalties is more pronounced for nonstate-owned enterprises and in regions with either high economic growth or a less developed economy. Furthermore, our analysis of an extremely severe haze pollution event in 2013 reveals that politically connected firms experienced fewer negative abnormal returns during the event period. The findings suggest that political connections pose challenges in holding highly polluting firms accountable for their environmental violations. JEL Classifications: M14; M20; Q50.