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 relation is more pronounced when the treatment firms are located in areas receiving more environmental complaints, with higher indices of PM2.5, and identified as key environmental protection cities. Furthermore, the post-event downward earnings management by polluting firms is associated with higher government subsidies on environmental protection investments, a lower likelihood of receiving government sanctions over environmental violations, less severe sanctions, and a more positive tone in media coverage, all of which indicate real benefits (incentives) for polluting firms to manipulate earnings down.