Does excess capacity strengthen firms' dependence on the polluting path? Evidence from Chinese iron and steel firms

Abstract

This paper studies the relationship between firms' excess capacity and their environmental behaviour by matching the environmental data of China's major iron and steel firms with the Chinese Industrial Enterprises database. The findings are as follows. (1) A firm's excess capacity leads to myopic decisions, and firms will pay more attention to short-run economic benefits at the cost of long-run environmental benefits, which strengthens their dependence on the polluting path. (2) The dependence is positively correlated with the transformation barriers, and either a higher innovation cost or a higher possibility of regulatory capture in local official governance would lead to greater dependence on the pollution path. (3) Mergers & acquisitions (M&As) may hopefully cut such dependency, but only cross-provincial M&As led by central state-owned enterprises (SOEs) can effectively alleviate the “pollution effect” of excess capacity, while intra-provincial M&As led by local SOEs fail to achieve such a goal.