Central-local collaborative environmental governance and firm-level environmental performance: the role of firm ownership

Using a unique dataset of publicly listed companies in China, we show that the collaborative environmental governance between the central and local governments reduces the effect of local enforcement of regulations on firms’ environmentally responsible behaviors. This is consistent with the fact that the Chinese central government uses a command-and-control type of regulations under which the local governments bear the full cost of enforcing the regulations. The local governments do not have the incentive to override the central supervision and therefore, simply lower their standard of enforcement and comply with the central supervision. However, this finding mainly reflects the results from the state-owned enterprises. For the private firms, the central supervision instead strengthens the impact of local enforcement. The heterogeneous results can be explained by the fact that the private firms are more financially constrained compared to the state-owned enterprises. They have the incentives to avoid the costs of complying with the regulations by paying a fine or colluding with the local regulators. The central supervision reduces the asymmetric information and increases the non-compliant firms’ chance to get caught for violations or collusion. This explains why once the central government intervenes, those private firms have to improve their environmentally responsible behaviors.