Managing Corporate Emission Disclosures Through Divestitures

Abstract

This paper provides evidence that regulated firms respond to the introduction of mandatory greenhouse gas (GHG) emissions disclosures in the United Kingdom by divesting assets, particularly to acquirers outside Europe. These transactions significantly decrease (increase) the regulated sellers’ (the acquirers’) emissions levels and intensities. Divestitures by regulated firms carry significantly lower valuation multiples compared to those by non-regulated firms, indicating fire sale prices for their divested assets. However, an increased likelihood of influential common ownership in both the divesting and acquiring entity suggests the economic benefits may be at least partially retained. The results document a possibly unintended consequence of geographically-limited environmental disclosure mandates: Rather than reducing the actual emissions they are required to disclose, firms may transfer legal ownership of high-emissions assets to owners beyond the mandate’s reach. The result is a mechanical decrease in the divesting firms’ reported emissions
which may not reflect a change in actual emissions.

Keywords: Greenhouse gas emissions, GHG emissions, divestitures, mandatory disclosures, real effects

JEL Classification: M41, G38, Q52, Q51