Brown Bag Seminar - Marcus Hober (SSE), Environmental Externalities of Short-Term Incentives

Paper

Environmental Externalities of Short-Term Incentives

Abstract

This paper examines how managerial short-term incentives affect firms’ industrial pollution. Exploiting a discontinuity in incentives to raise earnings per share through share repurchases, I find that short-term incentives lead to greater releases of toxic chemicals. These releases raise health hazards around affected facilities, exposing local communities to greater health risks. Evidence suggests that the deterioration in environmental performance is driven by reduced abatement and less recycling of toxic chemicals in waste streams. Notably, the effects on pollution are limited to facilities located in counties with weaker environmental regulation, and I find no evidence of subsequent environmental enforcement actions or legal liabilities. Overall, this study identifies an important environmental externality of managerial short-term incentives and highlights the role of regulation in mitigating its effects.