Local government environmental regulatory pressures and corporate environmental strategies: Evidence from natural resource accountability audits in China

Abstract

Abstract Incorporating natural resource management and eco‐environmental responsibility into the local government assessment system would change the local governments' intensity of environmental regulation. However, it is unclear whether and how this change is reflected in the firms' environmental strategies. This paper empirically examines the effects and mechanisms of local government regulation on firms' environmental strategies using the quasi‐natural experimental context of the Leading Officials' Natural Resources Accountability Audit (NRAA) in China. The results show that after the implementation of the NRAA, heavily polluting firms are more likely to adopt a source prevention strategy than an end‐of‐pipe governance strategy to cope with the local government's environmental management pressure. Resource support from local governments and increasingly stringent environmental constraints are potential channels for the NRAA to induce firms to adopt a preventive environmental strategy. The environmental governance pressure transmitted to firms differs due to different promotion expectations of local governments. Thus, corporate environmental strategies are related to government promotion expectations. In addition, we apply the Porter hypothesis to the NRAA. Finally, we explore the governance boundaries of the NRAA for different regions, audit intensities, and firms. This paper clarifies the interaction logic between the local governments' environmental constraints and the enterprises' environmental governance behaviors after the implementation of China's pilot policy, enriching research on natural resource asset audits and environmental governance.