Does air quality affect firms’ investment efficiency? Evidence from China

By utilizing the China listed firms from 2007 to 2016, we explore the impact of air quality on firms' investment efficiency. Empirical result indicates that better air quality increases firms' overinvestment, finally causes a lower investment efficiency. This conclusion is robust to the alternative measurements of investment efficiency and air quality, and quantile regressions. Furtherly, our results are still effective after we addressed the endogenous problems by using instrumental variable regression. After that, this effect is pronounced before the ‘China Haze’ event. Next, we find that impact of air quality is more pronounced in firms with stronger product market competition, higher institutional shareholding, large board size, and lesser board meeting. Finally, high air quality would be beneficial for firms' long-term growth because overinvestment increased by air quality contributes to a higher innovation output.