Finance seminar - Assistant Professor Chi-Yang Tsou - University of Manchester

A seminar by Assistant Professor Chi-Yang Tsou from University of Manchester

Title: Pollution Abatement Investment under Financial Frictions and Policy Uncertainty

Abstract: Using US firm-level data, we document significant differences in pollution abatement activities over the life cycle of firms. Smaller and younger firms are more constrained in financial indicators and have higher emission intensity. In addition, these firms invest more in physical capital and engage less in pollution abatement; interestingly, their abatement activities accelerate, and their emission intensity reduces as they accumulate more net worth. Motivated by this evidence, we develop and quantify a heterogeneous firm model to study the relationship between financial frictions, physical investment, and pollution abatement activities. In the model, constrained, smaller, and younger firms prefer physical investment over pollution abatement because the returns from the former are higher than those from the latter. The aggregate welfare loss from the sub-optimal environmental regulation due to financial frictions is about 40%.

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Assistant Professor Chi-Yang Tsou