Linking Pollution Toxicity and Human Exposure to Firm Idiosyncratic Risk

Abstract

Despite significant academic literature examining the link between pollution and firm performance, the firm risk implications of releasing pollution where humans face exposure has received very little attention from the academic community. In this study we use information processing theory to examine the impact of not only the toxicity level of a firm’s emissions, but also the extent of human exposure to those emissions. We consider the extent to which both pollution performance and the pollution dispersion pathway influence idiosyncratic risk for U.S. firms. Our findings suggest that the quantity of pollution alone has no direct impact on a firm’s idiosyncratic risk, but that the type of pollution and its degree of human exposure, which we term ‘environmental risk,’ highly influences idiosyncratic risk. Moderators of the relationship between environmental risk and idiosyncratic risk are also examined and discussed.

Keywords: environmental risk, pollution, financial risk, empirical