How does urban air pollution affect corporate environmental performance?

Prior studies have suggested that urban air pollution pushes firms to increase their corporate environmental performance (CEP) as a response to stakeholder pressures. However, we challenge the assumption that stakeholders generally recognize and punish firms’ environment-damaging behavior. Instead, we draw on the Broken Windows Theory of urban decline and hypothesize that increasing urban air pollution is likely to result in lower CEP. We also theorize on how some city characteristics can moderate our baseline hypothesis. Specially, we hypothesize that firms in more developed cities and in larger cities tend to increase their CEP as urban air pollution increases. We test our hypotheses using panel data analysis that includes 573 firms in 74 cities of 29 countries worldwide. Overall, we find that urban air pollution strongly and significantly reduces CEP.