Internalizing Environmental Externalities: The Role of Geographic Common Ownership

Job Market Paper
2024 American Finance Association Conference Poster Session, 2023 Singapore Scholars Symposium, 2023 Asia-Pacific Corporate Finance Online Workshop, 2023 Financial Management Association Conference Job Market Paper Presentation Session, Chinese University of Hong Kong (Shenzhen) seminar, Shanghai University of Finance and Economics seminar, Peking University HSBC Business School seminar, UIUC doctoral student seminar, and NUS brown bag meeting

This paper proposes and tests the hypothesis that common ownership of nearby firms, which I call geographic common ownership, incentivizes firms to internalize environmental externalities. Using US EPA Toxic Release Inventory data from 1987 to 2019, I find that facilities sharing significant common institutional ownership with nearby firms tend to release fewer toxic chemicals, compared to other facilities of the same parent firm. An analysis using mergers of financial institutions as a quasi-natural experiment suggests that the effect of geographic common ownership on toxic pollution is causal. Consistent with the idea that common owners internalize pollution externalities across their portfolio firms, mutual funds with larger ownership stakes in the area of a facility are more likely to vote in favor of shareholder-sponsored environmental proposals at the facility’s parent firm. Collectively, my findings highlight the potential role of common ownership in overcoming market failures pertaining to environmental externalities.

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