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The role of financial constraints in firm investment under pollution abatement regulation

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  • Dang, Tri Vi
  • Wang, Youan
  • Wang, Zigan

Abstract

This paper empirically analyzes pollution abatement regulation within the context of the Clean Air Act's nonattainment status designation and shows that financial constraints are an important determinant of whether spending on mandatory pollution abatement crowds out or stimulates R&D investment and capital expenditure. We show that spending on mandatory pollution abatement and other investments are complements for financially unconstrained firms but substitutes for constrained firms. Financially unconstrained firms invest more and have lower current profits but higher future profits; financially constrained firms invest less and have stable current profits but lower long-term profits. (JEL: G32, G38, Q58).

Suggested Citation

  • Dang, Tri Vi & Wang, Youan & Wang, Zigan, 2022. "The role of financial constraints in firm investment under pollution abatement regulation," Journal of Corporate Finance, Elsevier, vol. 76(C).
    • Handle: RePEc:eee:corfin:v:76:y:2022:i:c:s0929119922000955
    DOI: 10.1016/j.jcorpfin.2022.102252
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    More about this item

    Keywords

    Mandatory pollution abatement; Financial constraints; R&D; Capital expenditure;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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