Essays on environmental factors and corporate investment behaviours in China : a thesis presented in fulfilment of the requirement for the degree of Doctor of Philosophy in Finance at Massey University, Manawatu campus, New Zealand

Abstract

This thesis contains three essays. We mainly explore the impact of environmental factors on the corporate investment decisions and behaviours of listed firms in China. In the first essay, we investigate the impact of air pollution on corporate mergers and acquisitions (M&As) for acquiring firms based on their headquarters’ location. We find that air pollution decreases local firms’ M&A activities, and this result continues to hold after controlling for endogeneity and conducting a series of robustness tests. Our analysis indicates that this is achieved through its adverse effects on firms’ operational conditions, specifically by reducing net operating cash flow and increasing environmental expenditures. Additionally, we discover that the adverse effect of air pollution on M&As is impacted by external stakeholders; specifically, it is more significant for firms with limited access to external resources and firms located in regions with higher levels of environmental awareness. Conversely, firms with greater government subsidies and stronger financial health and growth opportunities are better able to mitigate these adverse effects. Our results also reveal that acquirers in high-pollution areas tend to prefer stock-based payment methods, take longer to complete acquisitions, generate less shareholder wealth, and bring negative market reaction, as well as suffer from declining performance in the long term. This research provides a comprehensive insight into the real effects of air pollution on corporate M&A activities. The second essay examines the impact of air pollution on corporate innovation investment, utilizing a novel measure of adjusted air pollution exposure that accounts for variations in exposure levels and the severity of local air pollution. This measure is calculated by multiplying a firm’s absolute sensitivity to air pollution (AQI exposure) by the city-level Air Quality Index (AQI), thereby capturing firms’ heterogeneous exposure to local air pollution and the degree of local air pollution. The findings indicate a significant negative relationship between adjusted air pollution exposure and corporate innovation investment. This relationship remains robust after addressing endogeneity concerns and performing a series of robustness checks. Furthermore, the negative effect of air pollution exposure is found to be mediated through reduced net operating cash flows and increased debt financing costs. However, state ownership appears to mitigate these adverse impacts. The negative influence is more pronounced in firms that disclose environmental information, exhibit low managerial risk tolerance, operate in non-polluting industries, are located in more developed and less polluted regions, or in the sub-samples after the signing of the 2015 Paris Agreement. This research highlights the critical role of adjusted air pollution exposure in shaping corporate innovation investment in China. The third essay estimates how corporate innovation investment responds to climate policy uncertainty. The findings show that climate policy uncertainty positively contributes to corporate innovation investment, and this finding remains robust after addressing endogeneity concerns and conducting a series of robustness checks. Furthermore, we find that stringent government environmental regulation serves as a potential mechanism, compelling firms to adopt cleaner production and increase their investment in innovation. In addition, this positive relationship for firms with higher government subsidies is stronger, and for firms with higher allocation of fixed assets disappears. We also find that firms with fewer connections to the government are more sensitive to climate policy uncertainty, and they tend to increase their investment in innovation to mitigate the uncertainty. Furthermore, when firms invest more in innovation during periods of high policy uncertainty, their long-term performance and firm value are likely to improve. Overall, this research underscores the critical role that climate policy uncertainty plays in shaping corporate innovation investment in China.