Mandatory Pollution Abatement, Financial Constraint and Firm Investment
83 Pages Posted: 1 Oct 2018 Last revised: 4 Mar 2020
Date Written: February 5, 2020
This paper analyses the effect of mandatory pollution abatement on U.S. corporate investment and performance and shows that environmental regulation can stimulate investment in innovation. The following set of theoretical and empirical results are presented. For financially unconstrained firms, mandatory pollution abatement leads to more current R&D investment, more future investment in pollution abatement, reduces current profits, increases future profits and reduces the market value of the firm. However, if firms are financially constrained three of the five consequences are different. It leads to less current R&D investment, less future investment in pollution abatement and lower future profits.
Keywords: Regulation, Mandatory Pollution Abatement, R&D, Firm Value
JEL Classification: G32, G38, Q58
Suggested Citation: Suggested Citation