Environmental Health Check: How third‐party environmental evaluation project affects corporate environmental responsibility

Abstract

Third‐party environmental evaluation by environmental organizations can provide an independent professional evaluation of firms' environmental behaviors. Because environmental organizations aim to improve environmental welfare, which reflects value rationality than instrumental rationality. We argue that third‐party environmental evaluation can reduce information asymmetries between central and local governments, and induce local governments to strengthen environmental enforcement, which in turn increases the pressure on polluters. At the same time, third‐party evaluation improves transparency and exposes firms' environmental opportunistic behavior, which increases the pressure on firms to take more responsibility for environmental protection. In an analysis of a large sample of Chinese listed firms over the period 2009–2018, we find that third‐party evaluation from environmental organizations has a positive impact on firms' environmental responsibility. This positive effect is stronger for firms located in regions with weak local protectionism and weaker for firms with less external shareholder monitoring.