Political Risk and Toxic Releases

Abstract

Studying the environmental impact of political risk, we find that firms more exposed to political risk decrease the releases of toxic chemicals and close polluting plants. We also find that the effect is not driven by decreases in production activities and that non-political risk does not have a similar impact. Further analyses reveal that firms more exposed to political risk incur higher environmental regulatory costs and invest more in green technology. Exploiting plausibly exogenous variations in political risk generated by the congressional redistricting following the 2010 decennial census, we show that the effect is likely to be causal. The result suggests that political risk exposure causes firms to reduce toxic releases to mitigate environmental regulatory actions.

Keywords: Political Risk, Toxic Release, Environment, Regulation

JEL Classification: G23, G30, G32