Informal regulation by nongovernmental organizations enhances corporate compliance: Evidence from a nationwide randomized controlled trial in China

Abstract

As a key component of informal regulation, nongovernmental organization (NGO) monitoring reduces the cost of government oversight and increases the visibility of corporate performance to stakeholders, thereby promoting corporate compliance. We conduct a nationwide randomized controlled trial (RCT) to investigate the causal effect of NGO monitoring on corporate compliance as measured by the environmental information disclosure (EID) of China's highly polluting listed companies. We find that companies improve their EID after being alerted to NGO monitoring, especially private companies and companies with poor baseline performance. Both the threat of being reported to regulators and that of being reported to the market are effective ways of NGO monitoring, while companies with strong political connections show no response to regulatory threats. Our findings indicate the efficacy of informal regulations and the significance of NGOs in the promotion of corporate compliance.