Meet, Beat, and Pollute

Review of Accounting Studies, forthcoming

62 Pages Posted: 21 Apr 2021 Last revised: 19 May 2022

See all articles by Jacob K. Thomas

Jacob K. Thomas

Yale School of Management

Wentao Yao

Xiamen University - School of Management

Frank Zhang

Yale School of Management

Wei Zhu

University of Illinois at Urbana-Champaign - Department of Accountancy

Date Written: May 18, 2022

Abstract

We investigate two related questions about the trade-off between short-term pressures on managers to meet earnings targets and the long-term environmental benefits of reduced pollution. Do firms release more toxins by cutting back on pollution abatement costs to boost earnings in years they meet earnings benchmarks? If so, is that relation weaker for firms with higher environmental ratings? Using Environmental Protection Agency (EPA) data on toxic emissions, we find that U.S. firms pollute more when they meet or just beat consensus earnings per share (EPS) forecasts, suggesting that meeting expectations is a more important goal than reducing pollution. We find this relation is stronger, not weaker, for firms with higher environmental ratings: they increase pollution even more when meeting earnings benchmarks than firms with lower ratings. This suggests that highly rated firms build regulatory and reputational slack over time and use it when needed to soften the negative impact of increased pollution. We contribute to the real earnings management and environmental economics literatures by documenting a negative externality of financial reporting incentives on the environment and society. We also contribute to the corporate sustainability literature by showing that environmental, social, and governance (ESG) focus does not curb managerial short-termism.

Keywords: ESG; corporate sustainability; managerial short-termism; meeting earnings benchmarks; real earnings management; externality

JEL Classification: G10, M14, M41, Q50

Suggested Citation

Thomas, Jacob and Yao, Wentao and Zhang, Frank and Zhu, Wei, Meet, Beat, and Pollute (May 18, 2022). Review of Accounting Studies, forthcoming, 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 - School of Management ( email )

No.422 Siming Nan Road
Xiamen, Fujian 361005
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

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