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: 
611/2019

Date posted :

July 05 2019

Last revised :

January 18 2021
SSRN Share

Keywords

  • 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.

 

View full abstract

Published in

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

Authors

Prof.
Real name:
Ian Appel
Research Member
University of Virginia (Darden)