Limited liability, piercing the corporate veil and pollution abatement: Evidence from China

Abstract

The absence of robust legal frameworks is a hallmark of developing nations, contributing to various moral hazard issues, including environmental degradation. In this paper, using the example of the introduction of the principle of piercing the corporate veil (PCV) in Chinese Company Law, we investigate how complementing the limited liability protection framework can improve firms' environmental performance. Employing a PSM-DID strategy, we find compelling evidence that the implementation of PCV leads to a significant reduction in pollution intensity and a decrease in the prevalence of highly polluting firms. In response to the pressure of joint and several liabilities resulting from PCV, firms adopt measures such as enhancing process controls and implementing end-of-pipe treatments to reduce emissions. Furthermore, business groups strategically adjust their production networks and internal factor markets to reduce the pollution emission intensity of their subsidiaries.