Preliminary Conference Programme

We show that even when firms' sustainability claims are costless and non-verifiable, they can still retain (partial) credibility. Non-babbling equilibria arise in a standard cheap-talk model when investors face uncertainty about both cash flows and the sustainability attribute. In such equilibria, sustainability claims are endogenously negatively correlated with cash flows and positively correlated with the sustainability attribute, even if the two are ex ante independent. The negative cash-flow implication of a claim serves as an endogenous cost, enabling credible communication. We characterize how disclosure behavior and credibility vary with the level of cash-flow uncertainty and provide novel empirical evidence supporting this mechanism. Our results shed new light on firms' communication of sustainability information in the absence of regulatory interventions.

Using US firm-level data, we document significant differences in pollution abatement activities over the life cycle of firms. Under financial constraints, smaller and younger firms invest more in capital and engage less in pollution abatement. As they accumulate more net worth, their abatement activities accelerate, and their emission intensity decreases. Motivated by this evidence, we develop and quantify a heterogeneous firm model to study the dynamics among financial frictions, capital investment, and pollution abatement. In the model, smaller and younger firms prefer capital investment over pollution abatement because the returns from capital investment are higher than those from pollution abatement. Such low returns of abatement expenditures come from both a lack of collateralizability and an increasing return to scale of operating abatement activities. More importantly, we demonstrate that financial frictions render environmental regulation suboptimal at any level, reducing the aggregate welfare gain by 40%. Finally, we show that even without monitoring, green loan policies are considerably effective in reducing emission intensity.

We study how firms respond to increased environmental liability using their

internal markets. We exploit the staggered adoption of Medical Monitoring

Claims (MMCs) across U.S. states. MMCs allow plaintiffs exposed to hazardous

substances to seek compensation for periodic medical examinations, even in the

absence of physical injury. Using a difference-in-differences approach, we find

that MMC adoption reduces the liable units’ toxic emissions by over 2%. The

effect is larger for carcinogenic and airborne pollutants, and when chemicals are

reclassified from non-carcinogenic to carcinogenic. These effects are driven by

single-unit, single-state firms, whereas multi-unit, multi-state firms arbitrage and

strategically adjust emissions. Finally, reductions in emissions within multi-unit

firms are larger for units in counties with higher levels of civic engagement and

for units with greater environmental capability. Our findings show the working of

an internal market that facilitates regulatory arbitrage.