Social Networks and Corporate Environmental Policy

This paper documents whether and how the directors’ social network affects firms’ environmental policies. We show that the degree of similarity in environmental policy between the two firms is positively associated with the number of directors’ connections they share. This study also highlights the asymmetric effects of good vs. bad behaviors. Specifically, if socially connected firms engage in poor environmental behaviors without facing significant punishment, firms tend to mimic their environmental policy. In contrast, companies are likely to amend their own environmental policy when their network peers are significantly punished for their poor environmental behaviors. We use directors’ deaths to address endogeneity concerns, and we find that firms’ environmental policies are less similar when a director connecting them dies. The social network effect is particularly prominent among successful firms (those capable of learning) and those with a CSR committee (those willing to learn). Furthermore, this paper attributes social network to both bright-side, such as differentiation strategy, and dark-side, such as agency problems in environmental activities.