Meet, beat, and pollute

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.

The two sides of corporate social responsibility and the quality of internal control audit opinions

“…Our findings suggest that the involvement of the auditor's client in responsible CSR can negatively affect ICOP quality. Together, our findings support the view that responsible and irresponsible CSR scores, rather than being viewed as opposite constructs, should be considered different types of social engagement that manifest different corporate actions (Garcia et al, 2021; Grewal & Serafeim, 2020) in which responsible CSR scores roughly correspond to inputs and irresponsible scores reflect outcomes (Thomas et al, 2022).…”

“…For our baseline model, we construct a general score, CSRScore , measured by subtracting total concerns from total strengths for the six basic dimensions of the MSCI KLD ratings representing different stakeholders (community, diversity, employees, the environment, human rights and products). However, recent research states that rather than being opposite constructs, strengths and concerns should be considered different types of social engagement that manifest different corporate actions (Garcia et al, 2021; Grewal & Serafeim, 2020) in which responsible CSR scores roughly correspond to inputs and irresponsible scores reflect outcomes (Thomas et al, 2022). To test H1, we examine these constructs separately by splitting CSRScore into total strengths, CSRResp (i.e., responsible CSR activities) and total concerns, CSRIrresp (i.e., irresponsible CSR activities).…”

“…On the other hand, irresponsible CSR activities primarily capture actual (observed) misbehaviour that is likely to cause significant damage to a firm's reputation. Therefore, responsible CSR scores correspond roughly to inputs, whereas irresponsible scores reflect outcomes (Thomas et al, 2022). 4…”

When Do Firms Deliver on the Jobs They Promise in Return for State Aid?

“…Given recent interest by ESG investors and standard setters in understanding whether firms responsibly steward government subsidies (e.g., Global Reporting Initiative), we focus on a metric that has traditionally reflected reputational gains with ESG investors: commercial ESG scores. Recent research (e.g., Raghunandan and Rajgopal 2022; Thomas et al 2022) argues that, while ESG scores do not always capture firms' underlying ESG performance, their importance with investors makes them a reasonable measure of firms' reputations for social responsibility. We thus examine whether meeting subsidy-specific job creation targets-demonstrating the type of responsibility sought by ESG investors-is rewarded by higher ESG scores.…”

“…We find that meeting job targets is associated with more positive subsequent news coverage of recipient firms, consistent with the accrual of reputational benefits. We focus on ESG scores as our second measure of reputation in light of recent literature (e.g., Thomas et al 2022) that highlights the primacy of these scores in developing firms' nonfinancial reputations. A firm that meets a job target can be thought of as having responsibly handled taxpayer funds; if there are reputational benefits to demonstrating responsibility to the community, these should be reflected in higher ESG scores for firms that meet targets.…”