Environmental Misconduct and Legitimacy Repair: Evidence From Targeted Poverty Alleviation Campaigns in China

Abstract

ABSTRACT Environmental administrative penalties not only impose regulatory and economic costs on firms but also threaten their legitimacy by undermining stakeholders' perceptions of their responsibility and reliability. Based on legitimacy theory, these legitimacy threats may motivate firms to undertake strategic responses beyond regulatory compliance, including socially valued initiatives aimed at restoring stakeholder evaluations. Utilizing data from Shanghai and Shenzhen A‐share listed firms from 2016 to 2022, we find that firms receiving environmental administrative penalties significantly increase their targeted poverty alleviation contributions. And this response is associated with multiple dimensions of legitimacy repair. Firms facing greater reputational, political, and resource‐related legitimacy pressures exhibit stronger increases in participating in targeted poverty alleviation campaigns after environmental administrative penalties. Furthermore, the dynamic effect analyses show that such responses are concentrated around the occurrence of environmental penalties rather than persisting over time. Moreover, environmental administrative penalties increase environmental investments but do not significantly promote innovation.