Does Private Equity Ownership Make Firms Cleaner? The Role Of Environmental Liability Risks

Aymeric Bellon, Finance, The Wharton School

Abstract: This paper studies whether private equity (PE) firms create value by reducing environmental externalities and documents a previously unrecognized channel through which PE contractual features affect their portfolio companies. Dynamic difference-in-differences models estimated on novel administrative and satellite datasets from the oil and gas industry suggest that PE ownership leads to a reduction of 70% in toxic pollution. I test several mechanisms that could explain this behavior. Exploiting a federal supreme court ruling as a natural experiment, I show that following a decrease in regulatory risks PE-backed firms increase pollution only if they are far from exiting their investment. Additional tests support the view that PE firms trade-off the benefits of reduced environmental liability risks that make the portfolio company attractive to more buyers with the net cost on long term operational income of reduced pollution.