The Effect of Air Pollution on IPO Reviews in China

We demonstrate the negative impact of air pollution on China’s Initial Public Offering review process. We find that the pass rate of firms with connection to the review committee is increased by 10 percentage points when reviewed on a polluted day. The effect only exists for air pollution during working hours and pollutants near the workplace of the reviewers. The result is unchanged when using the wind speed as an instrumental variable and when controlling for a variety of potential missing factors. Using LDA (Latent Dirichlet Allocation) model, we show that the reviewers intentionally ask trivial questions during the review, supporting the idea that the committee members become more reckless during hazy days. This effect translates to an economic loss amounting to RMB 200 billion (USD 33 billion)