TY - JOUR
T1 - Meet, beat, and pollute
AU - Thomas, Jake
AU - Yao, Wentao
AU - Zhang, Frank
AU - Zhu, Wei
N1 - Funding Information:
We thank Patricia Dechow (editor), two anonymous referees, Nerissa Brown, Judson Caskey (discussant), Vincent Castellani, Clara Chen, Rita Gunn, Naim Bugra Ozel, Shivaram Rajgopal, Aneesh Raghunandan, Theodore Sougiannis, Oktay Urcan, Edward Watts, Aaron Yoon, and participants at the 2021 Review of Accounting Studies Conference, 2021 AAA annual meeting, Penn State University, University of Illinois at Urbana-Champaign, University of Miami, University of New South Wales, Xiamen University, and Yale University for helpful comments and suggestions. We appreciate the comments and suggestions of the following EPA staff: Wes Austin, Ann Ferris, Al McGartland, and William Wheeler. Jake Thomas and Frank Zhang acknowledge financial support from the Yale School of Management. Wei Zhu acknowledges financial support from the Department of Accountancy, Gies College of Business. Wentao Yao acknowledges financial support from the Fundamental Research Funds for the Central Universities (No. 20720221048).
Funding Information:
We thank Patricia Dechow (editor), two anonymous referees, Nerissa Brown, Judson Caskey (discussant), Vincent Castellani, Clara Chen, Rita Gunn, Naim Bugra Ozel, Shivaram Rajgopal, Aneesh Raghunandan, Theodore Sougiannis, Oktay Urcan, Edward Watts, Aaron Yoon, and participants at the 2021 Review of Accounting Studies Conference, 2021 AAA annual meeting, Penn State University, University of Illinois at Urbana-Champaign, University of Miami, University of New South Wales, Xiamen University, and Yale University for helpful comments and suggestions. We appreciate the comments and suggestions of the following EPA staff: Wes Austin, Ann Ferris, Al McGartland, and William Wheeler. Jake Thomas and Frank Zhang acknowledge financial support from the Yale School of Management. Wei Zhu acknowledges financial support from the Department of Accountancy, Gies College of Business. Wentao Yao acknowledges financial support from the Fundamental Research Funds for the Central Universities (No. 20720221048).
Publisher Copyright:
© 2022, The Author(s).
PY - 2022/9
Y1 - 2022/9
N2 - We investigate two related questions about the trade-off between the short-term pressures on managers to meet earnings targets and the long-term environmental benefits of reduced pollution. Do firms release more toxins by cutting back on pollution abatement costs to boost earnings in years they meet earnings benchmarks? If so, is that relation weaker for firms with higher environmental ratings? Using Environmental Protection Agency (EPA) data on toxic emissions, we find that U.S. firms pollute more when they meet or just beat consensus earnings per share (EPS) forecasts, suggesting that meeting expectations is a more important goal than reducing pollution. We find this relation is stronger, not weaker, for firms with higher environmental ratings: they increase pollution even more when meeting earnings benchmarks than firms with lower ratings. This suggests that highly rated firms build regulatory and reputational slack over time and use it when needed to soften the negative impact of increased pollution. We contribute to the real earnings management and environmental economics literatures by documenting a negative externality of financial reporting incentives on the environment and society. We also contribute to the corporate sustainability literature by showing that an environmental, social, and governance (ESG) focus does not curb managerial short-termism.
AB - We investigate two related questions about the trade-off between the short-term pressures on managers to meet earnings targets and the long-term environmental benefits of reduced pollution. Do firms release more toxins by cutting back on pollution abatement costs to boost earnings in years they meet earnings benchmarks? If so, is that relation weaker for firms with higher environmental ratings? Using Environmental Protection Agency (EPA) data on toxic emissions, we find that U.S. firms pollute more when they meet or just beat consensus earnings per share (EPS) forecasts, suggesting that meeting expectations is a more important goal than reducing pollution. We find this relation is stronger, not weaker, for firms with higher environmental ratings: they increase pollution even more when meeting earnings benchmarks than firms with lower ratings. This suggests that highly rated firms build regulatory and reputational slack over time and use it when needed to soften the negative impact of increased pollution. We contribute to the real earnings management and environmental economics literatures by documenting a negative externality of financial reporting incentives on the environment and society. We also contribute to the corporate sustainability literature by showing that an environmental, social, and governance (ESG) focus does not curb managerial short-termism.
KW - Corporate sustainability
KW - ESG
KW - Externality
KW - Managerial short-termism
KW - Meeting earnings benchmarks
KW - Real earnings management
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U2 - 10.1007/s11142-022-09694-0
DO - 10.1007/s11142-022-09694-0
M3 - Article
AN - SCOPUS:85132331573
SN - 1380-6653
JO - Review of Accounting Studies
JF - Review of Accounting Studies
ER -