Politically Connected Polluters Under Smog

Yuhua Wang, Assistant Professor of Political Science, University of Pennsylvania

| CSCC Conference Room, Fisher-Bennett 345

I conducted an event study of an exogenous pollution shock–smog in the winter of 2013–to examine how the market values of firms in polluting industries and environmental protecting industries, respectively, responded in “the world’s worst polluter:” China. I first show that politically connected polluters, defined by having at least one board member who was a former local bureaucrat, are more likely to be state-owned and in debt. During the 21 days of the smog, polluters experienced a cumulative abnormal return of -4.85% while protectors had a cumulative abnormal return of 3.50%. However, politically connected polluters were less susceptible to the shock: connected polluters experienced a 1% greater positive abnormal return than unconnected polluters. In addition, connected protectors benefited a greater 1% abnormal return than unconnected protectors. The findings imply that environmental disasters have distributional effects and support a theory that links rent-seeking behavior to pollution.

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