2020/09/25 by PAT AKEY, Pat Akey, IAN APPEL +1 · 2 citations
Economics, Econometrics and Finance · Business, Management and Accounting · #Law, Economics, and Judicial Systems #Regulation and Compliance Studies #Legal and Constitutional Studies
paper · doi:10.1111/jofi.12978
ABSTRACT 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% to 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.