We propose and test the hypothesis that ownership connections between collocating firms facilitate the internalization of environmental externalities. Using the US EPA Toxic Release Inventory data from 1987 to 2019, we 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, our findings highlight the potential role of common ownership in addressing market failures pertaining to environmental externalities.
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environmental externality