Can a Penalty for Environmental Violations Promote Corporate Environmental Governance? An Analysis of the Deterrence Effect from the Perspective of Peer Influence

Abstract Previous studies have primarily advocated enhancing the deterrent effects of sanctions against offending firms to prevent organizational environmental violations. However, despite stricter regulatory environments, violations that cross the ‘red line’ remain pervasive. Limited research has delved into the factors that influence an organization’s ability to learn from environmental sanctions imposed on others. To address this gap, inspired by social learning theory, we examine whether environmental sanctions imposed on violating firms deter environmental governance among their industry and regional peers using a sample of Chinese-listed firms from 2008 to 2021. Our findings indicate that increasing the frequency and severity of penalties for offending firms – particularly those leading firms and state-owned-enterprises or those with close ties – can affect the environmental governance practices of their peers, both in terms of process and outcome, underscoring the critical role of peer influence in enforcing environmental regulations. Additionally, the current article also concludes that the general deterrence effect on peers is more pronounced in competitive industries and regions with underdeveloped legal frameworks.