Financial Constraints and Corporate Environmental Policies

We show that financial constraints affect corporate environmental policies because of significant abatement costs associated with hazardous waste management. Exploiting several experiments in which firms' internal resources are likely exogenously impacted, we find that relaxation of financial constraints reduces firms' toxic releases. The impact on toxic releases is amplified by weaker regulatory monitoring and enforcement, by myopic managers with short horizons, and when managers are under pressure to meet earnings targets. Overall, our evidence highlights the real effects of financial constraints in the form of environmental pollution.