The Hidden Cost of Going Green: Evidence from Firm-Level Violations

Abstract

This paper explores whether corporations resort to cutting social investments when responding to pressures from environmental authorities and various stakeholders to adopt pro-environmental policies. Our study documents the first evidence of a robust negative relationship between a firm’s social and environmental responsibilities, as measured by the penalties imposed on the firm’s social and environmental violations, respectively. Notably, a 100% decrease (increase) in environmental penalties results in a 23% increase (decrease) in social fines, indicating that firms shift between environmental and social responsibilities. We further use variations in environmental penalties following the passing of the Citizens United Ruling to reinforce our baseline evidence. Overall, when a firm goes green, it commits fewer environmental violations at the expense of its social responsibility. This phenomenon becomes more severe when management is under pressure from external and internal forces.

Keywords: Environmental and Social Issues, Responsibility Shifting, Violation Tracker

JEL Classification: G23, G30, G34, M14