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Meet, beat, and pollute

Author

Listed:
  • Jake Thomas

    (Yale University)

  • Wentao Yao

    (Xiamen University)

  • Frank Zhang

    (Yale University)

  • Wei Zhu

    (University of Illinois at Urbana-Champaign)

Abstract

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.

Suggested Citation

  • Jake Thomas & Wentao Yao & Frank Zhang & Wei Zhu, 2022. "Meet, beat, and pollute," Review of Accounting Studies, Springer, vol. 27(3), pages 1038-1078, September.
    • Handle: RePEc:spr:reaccs:v:27:y:2022:i:3:d:10.1007_s11142-022-09694-0
    DOI: 10.1007/s11142-022-09694-0
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    1. Dong, Qingkai & Raghunandan, Aneesh & Rajgopal, Shivaram, 2023. "When do firms deliver on the jobs they promise in return for state aid?," LSE Research Online Documents on Economics 120058, London School of Economics and Political Science, LSE Library.
    2. Zhang, Guanglong, 2023. "Regulatory-driven corporate greenwashing: Evidence from “low-carbon city” pilot policy in China," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).
    3. Zhang, Dongyang, 2023. "Does green finance really inhibit extreme hypocritical ESG risk? A greenwashing perspective exploration," Energy Economics, Elsevier, vol. 121(C).

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    More about this item

    Keywords

    ESG; Corporate sustainability; Managerial short-termism; Meeting earnings benchmarks; Real earnings management; Externality;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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