Mandatory Quality Verification and Corporate Pollution Emissions
Published:
Governments worldwide are increasingly instituting mandatory quality verification measures for critical industries, including the aerospace, automotive, pharmaceutical, cosmetic, and food sectors. In this study, we investigate the impact of mandatory quality verification on corporate pollution emission behavior. Using the introduction of the 2010 Good Manufacturing Practice (GMP) regulation in China’s pharmaceutical industry as a quasi-experiment, we find that the adoption of mandatory production standards motivates pharmaceutical manufacturers to increase pollutant emission intensity. Traditional Chinese Medicine (TMC) manufacturers increase their industrial wastewater emission intensity by 24.7% following the implementation of the 2010 GMP regulation, compared with non-TMC manufacturers. This effect is more pronounced in firms with less government ownership, operating in areas with lax environmental regulation, and in regions with limited access to external finance. Mechanism analysis reveals that firms have to spend more on capital expenditures to comply with GMP standards, which drove up their production costs and distress risk, disincentivizing them from investing in pollution abatement measures. Our study provides evidence that mandatory policies intended to enhance product quality can unexpectedly and adversely affect corporate environmental behavior.