An Unintended Consequence of Raising Public Environmental Awareness: Evidence from the Release of the Environmental Documentary “Under the Dome” on Earnings Management

Raising public environmental awareness provides many benefits. However, using an exogenous shock—the unexpected release of the environmental documentary “Under the Dome” in China—we show that raising environmental awareness may have the unintended consequence of distorting firms’ financial reporting behavior. Our difference-in-differences analyses suggest that polluting firms manage earnings downwards following the release of this documentary relative to control firms. This finding is not driven by underlying performance changes and are robust to a battery of identification tests. We also find that this relation is more pronounced when the treatment firms are located in areas receiving more environmental complaints, areas with higher indices of PM2.5, and areas that are closer to the local environmental protection bureaus. Furthermore, the post-event downward earnings management by the treatment firms is associated with a more positive tone in media coverage, higher government subsidies on environmental protection investments, a lower likelihood of receiving government sanctions over environmental violations, and less severe sanctions, all of which indicate real benefits (incentives) for polluting firms to manipulate earnings.