The effect of environmental administrative penalty on firm’s cash flow: evidence from China

Abstract

Ecological deterioration and environmental damage brought by high-speed economic growth in China caused high attention. Environmental administrative penalty is a powerful way for the government to realize environmental pollution control. When a firm is subjected to environmental administrative penalties, how the penalty affects operating cash flows is an important issue of concern to academic and practical circles. This paper examined the relationship between the environmental administrative penalty and the firm’s operating cash flow by using the ordinary least square method. It is found that environmental administrative penalty significantly decreases the firm’s operating cash flow in the following year. To increase the robustness of the result, the potential endogenous problems have been eliminated by using the two-stage least squares method. We found that the negative effect still exists. The finding increases the understanding of how environmental administrative penalties affect the firm operation and have practical enlightenments to corporate environmental management and environmental pollution control.