The Limits of Limited Liability: Evidence from Industrial Pollution

Pat Akey, Ian AppelFinance行为金融UTD24

Journal of Finance2020-09-25Boston College; Christophorus KlinikenDOI

Citations230

ABSTRACT We study how parent liability for subsidiaries' environmental cleanup costs affects industrial pollution and production. Our empirical setting exploits a Supreme Court decision that strengthened parent limited liability protection for some subsidiaries. Using a difference‐in‐differences framework, we find that stronger liability protection for parents leads to a 5% to 9% increase in toxic emissions by subsidiaries. Evidence suggests the increase in pollution is driven by lower investment in abatement technologies rather than increased production. Cross‐sectional tests suggest convexities associated with insolvency and executive compensation drive heterogeneous effects. Overall, our findings highlight the moral hazard problem associated with limited liability.

SubsidiaryInsolvencyLiabilityBusinessMoral hazardInvestment (military)Compensation (psychology)Empirical evidenceProduction (economics)HazardFinanceEconomics