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.

Michelle Eckert is Marketing and Communications Coordinator for the Mack Institute, where she works to engage students, researchers, and corporate partners in opportunities for collaboration. Michelle received her B.A. in Art from Valparaiso University in 2007. Her background includes two AmeriCorps terms of service working to teach mathematics, computer literacy, and job readiness skills to out-of-school youth in Philadelphia, focusing particularly on promoting access to post-secondary education.