Study finds businesses in cities with severe air pollution more likely to inflate bottom line

Air pollution

A new study co-authored by Charles H. Cho, professor of accounting and the Erivan K. Haub Chair in Business and Sustainability at York University’s Schulich School of Business, has found that businesses located in cities with severe air pollution are more likely to cook the books.

The study, titled “Contaminated Heart: Does Air Pollution Harm Business Ethics?,” showed that companies operating in cities with elevated levels of air pollution exhibit a greater likelihood of restating their financial statements and manipulating earnings to inflate their bottom line.

Charles Cho
Charles Cho

The research paper is co-authored Cho together with Zhongwei Huang, senior lecturer at City, University of London’s Cass Business School; Siyi Liu, assistant professor of accounting at the University of International Business and Economics; and Daoguang Yang, assistant professor of accounting at the University of International Business and Economics.

The study, which is forthcoming in the Journal of Business Ethics, revealed how the ecological environment can shape business ethics and analyzed data from a large number of companies in China.

“Air pollution is one of the greatest challenges faced by business and society,” said Cho, the study’s lead author. “We wanted to analyze how environmental degradation – in this case, air pollution – carries with it ethical, economic and social costs. These costs can negatively impact capital allocation and social welfare.

“Given that unethical financial reporting has an adverse effect on the value of a business as well as the public’s trust in that business, our research has relevant implications for shareholders and other market participants,” added Cho.