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Environmental effects of foreign indirect investment: The information channel

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  • Lou, Pingyi
  • Wu, Chenyu

Abstract

We investigate the environmental consequences of foreign indirect investment in China. By exploring the implementation of the Shanghai-Hong Kong Stock Connect program, which induced a positive shock to foreign indirect investment, we find that connected firms reduced their commitment to environmental responsibility more than unconnected firms. We document evidence that this can be attributed to the switch from accrual-based earnings management to real earnings management when the information environment improves after the shock. This effect is more pronounced for firms that face weak environmental regulation and low social norm costs, which amplify the unintended consequences of the information channel of stock market liberalization in developing countries.

Suggested Citation

  • Lou, Pingyi & Wu, Chenyu, 2024. "Environmental effects of foreign indirect investment: The information channel," Journal of International Money and Finance, Elsevier, vol. 144(C).
    • Handle: RePEc:eee:jimfin:v:144:y:2024:i:c:s0261560624000585
    DOI: 10.1016/j.jimonfin.2024.103071
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    More about this item

    Keywords

    Environmental performance; Foreign indirect investment; Capital market liberalization; Information environment; Real earnings management;
    All these keywords.

    JEL classification:

    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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