Three essays on sustainable finance

Abstract

This thesis consists of three papers on sustainable finance. The key goals are: (1) to identify the economic and financial consequences of environmental and social (E\&S) risks, and (2) to examine the economic factors and frictions that drive economic agents to internalize E&S issues and corporate sustainability.

The first paper, "Do Health Risks Shape Firm Boundaries?", studies whether pollution-induced health risks affect the corporate make-or-buy decision. The empirical design builds on the United States Report on Carcinogens that officially recognizes cancer risks, which allows me to identify firms that are exposed to increased health risks in the form of cancer risks. The main finding is that the official recognition of cancer risks leads firms to lower in-house production and outsource polluting activities due to litigation risks. However, as larger polluters scale up polluting activities, aggregate pollution levels remain unchanged while market concentration increases. The findings highlight that individual mitigation effort may not necessarily translate into a reduction in aggregate pollution.

The second paper, How Does Climate Change Affect Firm Sales? Identifying Supply Effects, studies whether local temperature affects firm sales. The empirical design uses production networks in the United States as a laboratory to control for product demand. The main finding is that a 1 degree celsius increase in average temperature lowers inter-firm sales by 2% after controlling for demand. The effects are driven by labor-intensive firms, financially and operationally constrained firms, and firms that sell more substitutable goods. The findings highlight that local temperature can have economically significant effects on corporate performance via a supply-side channel.

The third paper, "Do Employee Rights Affect Shareholder Value?", studies whether legal entitlements to employees affect shareholder value. The empirical design uses a series of court rulings in the United States as a shock to weaken employee rights. The main finding is that weakened employee rights lower firm value and firm cash flows. Additional analyses suggest that employee treatment deteriorates and leads to a reduction in workforce. The findings highlight that employee rights can affect shareholder value via a human capital channel.

Together, these three papers summarize the type of economic questions that interest me the most, and outline my research agenda going forward.