Manufacturer contributions to China’s poisonous rivers and life-threatening smog are well documented in the decade since the government started publicizing polluting events and safety violations. But whether environmental ignominy at Chinese businesses is a problem for the thousands of overseas companies that buy their products has been less clear.
New research by Hong Kong Polytechnic University’s Chris K.Y. Lo, UCLA Anderson’s Christopher S. Tang and Hong Kong Polytechnic’s Yi Zhou, Andy C. L. Yeung and Di Fan gives companies across the capitalist world reason to worry. The study finds that Chinese manufacturers that violated environmental regulations drag down the share prices of their overseas customers even more than their own market values.
Data in the paper show that shares of a Chinese manufacturer dropped an average 0.41 percent in a two-day period surrounding a pollution event of its doing, or an announcement that it violated an environmental regulation. Shares of important overseas customers — defined as top-five buyers — fell an average 1.13 percent on the event, according to the results.
Political ties that ostensibly protect Chinese manufacturers during crises become liabilities to both the supplier and its customers when they are involved in environmental incidents, UCLA Anderson’s Tang explains in an interview. Although U.S. companies often seek out Chinese suppliers with political ties, shares of both the manufacturer and its overseas customers fell more steeply when government officials were in the boardrooms or executive suites of accused companies, Tang said.