The Limits of Limited Liability: Evidence from Industrial Pollution

By Pat Akey, Ian R. Appel. Journal of Finance, 2020

160 citations recorded by the source corpus.

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 5-9% 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.

Subfields: Accounting, Economics and Econometrics, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/705efe08e404d0a5b51cd053ee21204eedc5b8f9

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Citations in the corpus

The Importance of Climate Risks for Institutional Investors (2020, background): “Akey and Appel (2018) and Bartram, Hou and Kim (2019) show that pollution has real effects on firm decisions.”