Financial Frictions and Pollution Abatement Over the Life Cycle of Firms

87 Pages Posted: 22 Mar 2023

See all articles by Min Fang

Min Fang

University of Florida - Department of Economics

Po-Hsuan Hsu

National Tsing Hua University - Department of Quantitative Finance; National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Chi-Yang Tsou

The University of Manchester - Alliance Manchester Business School

Date Written: March 16, 2023

Abstract

Using US firm-level data, we document significant differences in pollution abatement activities over the life cycle of firms. Under financial constraints, smaller and younger firms invest more in capital and engage less in pollution abatement; as they accumulate more net worth, their abatement activities accelerate, and their emission intensity reduces. Motivated by this evidence, we develop and quantify a heterogeneous firm model to study the relation between financial frictions, capital investment, and pollution abatement. In the model, smaller and younger firms prefer capital investment over pollution abatement because the returns from the former are higher than those from the latter. More importantly, we show financial frictions make environmental regulation sub-optimal at any level: they reduce aggregate welfare gain by 40%. Finally, we show that green loan policies, even without monitoring, are considerably effective in reducing emission intensity.

Keywords: Financial frictions, pollution abatement, heterogeneous firms, environment, climate;

JEL Classification: E1, E2, E3, E6, G1, G3, K3, Q5

Suggested Citation

Fang, Min and Hsu, Po-Hsuan and Tsou, Chi-Yang, Financial Frictions and Pollution Abatement Over the Life Cycle of Firms (March 16, 2023). Available at SSRN: https://ssrn.com/abstract=4390975 or http://dx.doi.org/10.2139/ssrn.4390975

Min Fang (Contact Author)

University of Florida - Department of Economics ( email )

224 Matherly Hall
Gainesville, FL 32606
United States

HOME PAGE: http://www.minfang.info

Po-Hsuan Hsu

National Tsing Hua University - Department of Quantitative Finance ( email )

101, Section 2, Kuang-Fu Road
Hsinchu, Taiwan 300
China

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Chi-Yang Tsou

The University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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