Financial Constraints and Corporate Environmental Policies
73 Pages Posted: 30 Aug 2017 Last revised: 18 May 2020
Date Written: May 15, 2020
This paper documents evidence that financial constraints increase firms' toxic emissions given that firms actively trade off abatement costs against potential legal liabilities. Exploring three quasi-natural experiments in which firms' financial resources are likely exogenously impacted, we find that relaxing financial constraints reduces U.S. public firms' toxic releases. The effects of financial constraints on toxic releases are amplified when regulatory enforcement weakens and when myopic managers emphasize short-term earnings performance. Overall, our evidence highlights the real effects of financial constraints in the form of environmental pollution, which is a costly negative externality imposed on society and public health.
Keywords: Financial Constraints, Corporate Environmental Policies
JEL Classification: G32
Suggested Citation: Suggested Citation