Do Promarket Reforms Prevent Firms' Environmental Misconduct? The Role of Political Ties and Returnee Directors in Emerging Economies

Abstract

Despite recognizing the importance of promarket reforms in enhancing firms' accountability and development in emerging economies like China, their critical role in deterring environmental misconduct has been largely overlooked in the existing literature. To address this gap, this study draws on institutional theory to explore the relationship between promarket reforms and the reduction of environmental misconduct, focusing on the moderating effects of political ties (PT) and returnee directors. Analyzing a sample of 721 Chinese firms, we find a significant negative relationship between promarket reforms and environmental misconduct. Moreover, PT weakens this relationship, whereas returnee directors strengthen it. These findings remain robust across various alternative measures and endogeneity tests, including propensity score matching analysis, Heckman two-stage model, and a 2-year lagged analysis. Overall, this study adds value to corporate strategy and environmental management literature by shedding novel insights into the role of promarket reforms in addressing environmental misconduct in emerging economies.