The Limits of Limited Liability: Evidence from Industrial Pollution

The Limits of Limited Liability: Evidence from Industrial Pollution

Pat Akey, Ian Appel

Series number :

Serial Number: 

Date posted :

July 05 2019

Last revised :

January 18 2021
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  • Limited Liability • 
  • Industrial Pollution • 
  • moral hazard • 
  • Risk-shifting • 
  • investment

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.


Published in

Published in: 
Publication Title: 
Journal of Finance, 2021, 76(1), pp 5-5


Real name:
Research Member
University of Virginia (Darden)