The Effects of Air Pollution on Firms’ Internal Control Quality: Evidence from China

Research on the consequences of air pollution has tended to focus on the macro and environmental effects on human health, often ignoring micro effects. In this paper, we empirically investigate the micro-institutional costs of air pollution, and our results show that in China, firms’ internal control quality is significantly and negatively associated with the severity of air pollution in its home city and that the most significant effects of air pollutants are those of PM2.5 and SO2, confirming that air pollution incurs micro-institutional costs. We find that this effect varies depending on factors related to the environment, ownership structure, the demographic traits of the board of directors’ chairman, and employees. Further analysis indicates that air pollution can degrade the quality of accounting information, provoke agency problems, and lower firm value. This study reveals the micro-institutional costs of air pollution and identifies the mechanisms by which air pollution affects the quality of macroeconomic development. By so doing, this study enables China’s government and public to better its understanding of air pollution and recognize the value of the Blue-Sky Protection Campaign. This study also reinforces the importance of the transition toward a new economic mode based on “high-quality development,” which will play a vital role in China’s new era.