The Effects of Mandatory Pollution Abatement on Corporate Investment and Performance: Theory and Evidence from a U.S. Regulation

Abstract

This paper analyses the effect of mandatory pollution abatement on U.S. corporate investment and performance and shows that environmental regulation can stimulate investment in innovation. The following set of theoretical and empirical results are presented. For financially unconstrained firms, mandatory pollution abatement leads to more current R&D investment, more future investment in pollution abatement, reduces current profits, increases future profits and reduces the market value of the firm. However, if firms are financially constrained three of the five consequences are different. It leads to less current R&D investment, less future investment in pollution abatement and lower future profits.