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We investigate the association between accounting conservatism and environmental performance in China’s setting. Firms with better accounting information quality are found to reduce their environmental engagement. The result supports the resource dependent theory that executives strategically use accounting conservatism as a substitute for environmental commitment due to its long investment scale and possible low economic return in a short run.

The results remain robust after addressing endogeneity concerns using the IV 2SLS estimations, controlling for multiple fixed effects, using the DID method and utilizing alternative environmental measurements. We further find that the increased short-term financing and reduced attention from analysts due to providing conservative financial reporting are the two mechanisms that explain the negative relationship between accounting soundness and environmental performance. In addition, political connections and the level of policy


constraints that firms are subject to reshape the relationship between accounting conservatism and corporate environmental performance. The negative relationship is weakened in firms with executives currenting hold a government-nominated position, and firms facing tougher policy constraints. In addition, internal and external pressures, such as financing constraints and industry competition, also moderate the substitution effect of accounting conservatism. Our results suggest that firms under pressure need to make more efforts to satisfy powerful stakeholders.

Our study has important policy implications. Our results highlight that adopting accounting conservatism can function as an efficient mechanism that affects corporate environmental commitment. Particularly, we call for attention that policy makers need to consider how to promote the concept of eco-friendly corporations to firms that have catered for stakeholders with conservative accounting reporting.



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Appendix 1. Variable description

Variable Description

ER Industry-year adjusted Hexun environmental responsibility score. Following Li et al. (2021), it is calculated as Hexun environmental responsibility score minus its mean value for all firms in the same industry in a year. The higher the score is, the higher the firm’s environmental performance.

Hexun ER Raw data of Hexun environmental performance score, ranged from 0 to 30. The higher the score is, the higher the firm’s environmental performance.

Disclosure Environmental information disclosure score (ranged from 0 to 11). The higher the score, the higher environmental disclosing quality.

CScore Accounting conservatism measure. A higher CScore indicates more conservative accounting activities.

M/B Ratio The ratio of market value to its book value of equity.

Sales Growth Change in sales between years t and t-1.

LEV Total liabilities scaled by total assets.

Size The natural logarithm of total assets.

Board Size Thenatural logarithm of the total number of directors on the board.

Board Independence The proportion of independent directors to the total number of directors on the board.

Big4 A dummy variable equals one if the auditor of the firm is one of international ‘Big4’ audit firms, and zero otherwise.

Top1 The largest shareholding ratio.

SOE A dummy variable equals one if the ultimate controller of a firm is a government agency or a state-owned enterprise, and zero otherwise.

R&D/Sales R&D expenses scaled by total sales.

ROA Return on assets, calculated as net profit after tax/total assets.

GDP Growth Rate The per capita GDP growth rate of the province where the firm is located.

Robustness controls

Age Age of firm, measured as number of years since listing.

InvestmentCycle Proxy of a firm's investment-cycle length, calculated as depreciation divided by lagged total assets.

EI The natural logarithm of corporate environmental investment plus one.

Cost/Sales Industry-year adjusted corporate environmental protection and pollution treatment expenses divided by sales and times 1000.

Ascribed bureaucratic connection

A dummy variable equals one when the chairman has previous government experience.

Achieved political connections

A dummy variable equals one when the chairman is appointed to state organs such as National People’s Congress, Local People’s Congress, Chinese People’s Political Consultative Conference, or Local People’s Political Consultative Conference.

HHI The Herfindahl-Hirschman index that proxies the industry concentration, calculated as the sum of the squares of market shares of all firms in a particular market. The lower the index, the higher the competition in the industry sector.

CR4 The sum of the market share (revenue) of the top four largest


firms in an industry. The smaller the index, the fiercer the competition.

Analyst Attention The natural logarithm of the number of analysts (teams) that cover a firm in a year.

Report Attention The natural logarithm of the number of analyst research reports about a firm in a year.

Debt/TA The ratio of short-term debts to total assets.

WW Following Whited & Wu (2006), the WW index is calculated as:

WW = (0.091*CF) – (0.062*DIVPOS) + (0.021*TLTD) – (0.044*LNTA) +(0.102*ISG) – (0.035*SG)

where CF is ratio of cash flow divided by total assets; DIVPOS is a dummy variable equals to one if the firm pays dividend, and otherwise zero; TLTD is long-term debt to total assets; LNTA is the natural logarithm of total assets; ISG is an industry's average sales growth; and SG is a firm’s sales growth. A higher value of the WW index implies a greater level of financial constraints.

FC Following Fee et al. (2009), the FC index is calculated as:

P(𝑄𝑈𝐹𝐶 = 1 or 0|𝑍𝑖,𝑡) = 𝑒𝑍𝑖,𝑡

1+𝑒𝑍𝑖,𝑡 𝑍𝑖,𝑡= 𝛼0+ 𝛼1𝑆𝑖𝑧𝑒𝑖,𝑡+ 𝛼2𝐿𝑒𝑣𝑖,𝑡+ 𝛼3(𝐶𝑎𝑠ℎ𝐷𝑖𝑣

𝑇𝑎 )𝑖,𝑡+ 𝛼4𝑀𝐵𝑖,𝑡+ 𝛼5(𝑁𝑊𝐶

𝑇𝑎 )𝑖,𝑡+ 𝛼6(𝐸𝐵𝐼𝑇

𝑇𝑎 )𝑖,𝑡 where Size is the natural logarithm of total asset; Lev is total liabilities/total assets; CashDiv is cash dividends paid by a firm in a year; MB is a firm’s market value/book value; NWC is net working capital=working capital - monetary funds - short-term investments; EBIT is earnings before interest and tax.

absSA Absolute values of the SA index (absSA). Following Hadlock &

Pierce (2010), the SA index is calculated as:

𝑆𝐴 = −0.737*Size+0.043*𝑆𝑖𝑧𝑒2-0.040Age where Size is the natural logarithm of total asset; Age is the operating year of the firm. A higher absolute value of the SA index implies a greater level of financial constraints.

Keypolluter A dummy variable equals to one if the firm is identified as a key-polluter, and zero otherwise.

40 Appendix 2. Correlation matrix

This table reports the correlation coefficients between key variables. Definitions of variables are in Appendix 1. The superscripts *, **, and *** indicate significance at the 10%, 5%, and 1% levels, respectively.

1 2 3 4 5 6 7 8 9 10 11 12

1 CScore 1.000

2 Top1 -0.064*** 1.000

3 Board Size -0.065*** 0.020** 1.000

4 Board Independence -0.006 0.040*** -0.463*** 1.000

5 M/B ratio 0.121*** -0.089*** -0.197*** 0.062*** 1.000

6 Sales Growth 0.004 -0.004 -0.024*** -0.002 0.050*** 1.000

7 R&D/Sales 0.003 -0.094*** -0.049*** 0.044*** 0.149*** -0.007 1.000

8 ROA -0.038*** 0.098*** -0.015* -0.020** 0.287*** 0.173*** 0.009 1.000

9 Big4 -0.068*** 0.125*** 0.105*** 0.020** -0.114*** -0.034*** -0.023** 0.033*** 1.000

10 LEV -0.039*** 0.076*** 0.168*** -0.017* -0.487*** 0.041*** -0.129*** -0.393*** 0.105*** 1.000

11 Size -0.222*** 0.219*** 0.277*** 0.011 -0.533*** 0.051*** -0.061*** -0.023** 0.331*** 0.521*** 1.000

12 GDP Growth Rate 0.029*** -0.012 0.062*** -0.028*** -0.079*** 0.002 -0.054*** -0.015 -0.076*** 0.063*** -0.136*** 1.000


Appendix 3. Dimensions Indicator name I1: Legal consciousness

1. Whether a firm discloses environmental protection concept, environmental policy, environmental management organization structure, circular economy development mode, green development.

2. Whether a firm discloses a series of management systems, such as relevant environmental management systems, systems, regulations and responsibilities, formulated by the firm.

3. Whether a firm is subject to environmental violations, environmental petition cases or sudden environmental accidents.

I2: Social evaluation

1. Whether a firm received any environmental awards.

2. Whether a firm discloses special environmental protection activities, environmental protection and other social public welfare activities that the firm participates in.

3. Whether a firm discloses the establishment of an emergency mechanism for major environmental emergencies, the emergency measures taken, and the treatment of pollutants.

I3: Eco-friendly production

1. Whether a firm adopts a clean production.

2. Whether a firm discloses the implementation of the "three simultaneous" system.

3. Whether a firm discloses the establishment of an emergency mechanism for major environmental emergencies, the emergency measures taken, and the treatment of pollutants.

I4: Green management

1. Whether a firm has an ISO 14001 certification.

2. Whether a firm has an ISO 9001 certification.


Table 1. Descriptive statistics

Panel A shows the summary statistics of the main variables used in this study. Panel B shows the sample distribution by industry. Industry classification is based on Industry Classification and Code of China's National Economy (GB/4754-2011). Hexun ER denotes Hexun environmental responsibility score.

Disclosure denotesenvironmental information disclosure score. Definition of variables is reported in Appendix 1.

Panel A Summary statistics

Variable N Mean Std. Dev. Min Max

Hexun ER 12,148 1.998 5.307 0.000 30.000

Disclosure 12,148 1.510 1.902 0.000 9.000

CScore 12,148 -0.001 0.435 -1.974 1.975

M/B 12,148 2.098 1.776 0.200 9.250

Sales Growth 12,148 0.194 0.443 -0.510 2.789

R&D/Sales 12,148 0.004 0.014 0.000 0.087

ROA 12,148 0.040 0.048 -0.131 0.184

LEV 12,148 0.435 0.211 0.053 0.888

Size 12,148 22.177 1.238 19.862 25.844

Board Size 12,148 8.744 1.706 5.000 15.000

Board Independence 12,148 0.372 0.052 0.333 0.571

Big4 12,148 0.056 0.229 0.000 1.000

Top1 12,148 0.353 0.150 0.089 0.748

SOE 12,148 0.421 0.494 0.000 1.000

GDP Growth 12,148 0.078 0.020 0.033 0.146

Analyst Attention 9,520 1.781 1.068 0.000 3.714

Report Attention 9,558 2.298 1.292 0.000 4.682

Debt/TA 11,580 0.101 0.106 0.000 0.558

Ascribed bureaucratic

connection 12,122 0.058 0.234 0.000 1.000

Achieved political

connections 12,070 0.099 0.299 0.000 1.000

WW 12,148 -1.017 0.070 -1.217 -0.854

FC 12,148 0.447 0.291 0 0.992

absSA 12,148 3.748 0.236 2.146 4.718

Keypolluter 12,148 0.088 0.284 0.000 1.000

HHI 12,148 0.057 0.088 0.008 0.453

CR4 12,148 0.296 0.194 0.109 0.892

EI 756 6.082 2.789 0.412 11.535

Cost/Sales 1,356 0.000 2.113 -5.368 13.004

Panel B Sample industry distribution

Industry N Hexun ER Disclosure

Mining Industry 222 5.581 3.090

Transportation, Warehousing and Postal Services 427 4.165 1.555

Construction Industry 309 3.231 1.848

Electricity, Heat, Gas and Water Production and

Supply 374 2.612 1.385

Manufacturing Industry 8,101 1.954 1.706

Public Administration, Social Security and Social

Organization 306 1.677 0.627

Hotels and Catering Services 16 1.656 1.500

Whole-sales and Retail Trade 671 1.607 0.718

Water Conservancy, Environment and Public 87 1.563 1.494

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