Michael Welker
Professor & Stephen J.R. Smith Chair of Accounting
Ning Zhang
Professor & Commerce '83 Fellow of Accounting
- Adapted from: “Gone With the Wind: An Externality of Earnings Pressure”
- Based on Research by: Zheng Liu, Hongtao Shen, Michael Welker, Ning Zhang, Yang Zhao
- Journal: Journal of Accounting and Economics
Key Takeaways
- Companies under pressure to meet earnings targets tend to emit more sulfur dioxide, especially in regions with weak monitoring, low regulatory enforcement, or minimal litigation risk.
- The findings highlight a tension between financial performance and environmental responsibility, emphasizing the need for stronger oversight and accountability to align corporate actions with societal and environmental priorities.
- The study used detailed establishment-level emissions data from China's Environmental Survey and Reporting (ESR) database (2003–2012), cross-verified to ensure accuracy, and linked it with establishment-level financial data from the Chinese Industrial Enterprise Database (CIED), covering firms meeting specific sales thresholds.
In the relationship between economic growth and environmental sustainability, a critical question emerges: How do the pressures of capital markets influence a firm's environmental footprint? This study by Michael Welker, Ning Zhang and their colleagues delves into this complex relationship, uncovering a startling connection between earnings pressure and sulfur dioxide (SO2) emissions in China. As the world grapples with these challenges, Welker and Zhang’s research sheds light on an often-overlooked externality of corporate actions. By examining detailed establishment-level data from China, the authors reveal that firms under earnings pressure – the relentless drive to meet or beat earnings expectations – tend to release significantly more SO2 into the atmosphere. This finding not only highlights the environmental costs of short-term financial goals, but also underscores the need for robust regulatory frameworks, enhanced litigation risk and mandatory corporate social responsibility reporting to mitigate these negative impacts.
This study reveals that firms under earnings pressure, defined as managers’ incentives to meet or beat earnings expectations, have higher SO2 emission intensities. This effect is statistically and economically significant, with pressured firms releasing 0.257 kg more SO2 per 1000 CNY of output compared to non-pressured firms, resulting in a 26.7% higher emission intensity. The impact of earnings pressure on SO2 emissions is more pronounced in environments with weak monitoring and regulatory enforcement. Establishments in areas with stronger monitoring, such as those designated for SO2 control or during international events like the 2008 Beijing Olympics, show less pronounced effects of earnings pressure on emissions. Conversely, economically important establishments and State-Owned Enterprises (SOEs), particularly those tied to the central government, exhibit higher emissions due to weaker regulatory enforcement.
The findings have important implications for regulators, corporate governance, investors and public health. Stronger regulatory enforcement and monitoring can mitigate the negative environmental impacts of earnings pressure. Mandatory CSR disclosure can align corporate actions with environmental stewardship. Investors should be aware that firms under significant earnings pressure may compromise long-term sustainability for short-term gains. Reducing emissions from these firms can lead to better air quality and improved public health outcomes.