Meet, Beat, and Pollute

61 Pages Posted: 21 Apr 2021 Last revised: 18 Nov 2021

See all articles by Jacob K. Thomas

Jacob K. Thomas

Yale School of Management

Wentao Yao

Xiamen University

Frank Zhang

Yale School of Management

Wei Zhu

University of Illinois at Urbana-Champaign - Department of Accountancy

Date Written: November 18, 2021

Abstract

Rising demand for corporate environmental sustainability is a potential market-based mechanism that induces firms to internalize their environmental impact. However, given that reducing pollution yields benefits over the long term, managers remain responsive to conflicting short-term pressures. We investigate two related questions: do firms pollute more because they cut pollution abatement costs to achieve short-term earnings benchmarks, and is this effect weaker for firms rated as more environmentally friendly. Using plant-level EPA data on toxic emissions, we show that US firms that meet or just beat consensus EPS forecasts release significantly more toxins as they cut pollution abatement costs to boost earnings. However, we find that this positive relation between meeting benchmarks and pollution is elevated, rather than attenuated, for firms with better environmental ratings. One explanation for this surprising finding is that firms with better environmental track records have built goodwill that softens the negative impact of sporadic pollution increases. Our paper contributes to the literatures on environmental externalities, ESG focus of firms and their stakeholders, and real earnings management.

Keywords: ESG; sustainable investing; managerial short-termism; meeting earnings benchmarks; real earnings management; externality; pollution

JEL Classification: G10, M14, M41, Q50

Suggested Citation

Thomas, Jacob and Yao, Wentao and Zhang, Frank and Zhu, Wei, Meet, Beat, and Pollute (November 18, 2021). Available at SSRN: https://ssrn.com/abstract=3830867 or http://dx.doi.org/10.2139/ssrn.3830867

Jacob Thomas

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Wentao Yao

Xiamen University ( email )

Xiamen
China

Frank Zhang

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Wei Zhu (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
69
Abstract Views
1,247
rank
419,024
PlumX Metrics