Executive escape: Executives flee when neighbouring firms pollute

Ross Levine, Chen Lin, Zigan Wang 14 June 2020

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When firms emit toxic pollutants they increase infant mortality, neurodevelopmental disorders, respiratory and cardiovascular disease, cancer rates, and premature death. The World Health Organization (2016) attributes about one in six deaths to air pollution. In the US, more than 40% of the population lives in counties with unhealthy levels of air pollution according to the American Lung Association (2019). Consequently, researchers examine the effect of environmental regulations on health and economic activity (Becker and Henderson 2000, Currie and Neidell 2005, Greenstone 2002, Isen et al. 2017).

While the health effects of pollution are clear and extensive research explores the impact of environmental protection regulations on health and the economy, the impact of one firm’s toxic emissions on neighbouring firms’ employees and profits are less clear. Intuitively, people will try to escape from living and working in areas with toxic pollutants (Chen et al. 2017). In turn, the migration of talented individuals from a firm could materially influence the firm’s productivity and profitability. But does this hold in practice and are there economic incentives for some corporations to lobby for tougher environmental regulations against the toxic emissions of neighbouring firms?

Our recent study (Levine et al. 2020) examines (1) the degree to which corporate executives leave their firms when neighbouring plants start emitting toxic pollutants and (2) the impact of such executive migrations on the firms that they leave. We also assess another potential consequence of pollution: the migration of highly-valued employees from firms that are geographically close to polluting plants.

Our focus is on executives – and not on employees more generally – for two reasons. First, executives exert a significant impact on corporate policies and stock prices. Second, we can trace the career paths of executives over time and across corporations. We create a unique database on the career paths of all executives at S&P 1500 firms over the period 2000–2014. We assemble data on where executives work, their titles within those corporations (e.g. CEO, COO, CFO, etc.), when they depart, and to which firms they migrate.

These data on executives are combined with data on toxic emissions. The location and starting dates of plants in the US that emit airborne toxic pollutants are identified using the Environmental Protection Agency’s (EPA’s) Toxic Release Inventory (TRI) programme, which includes the exact location and opening dates of 48,317 TRI plants. We show that TRI plant openings are associated with a material increases in airborne pollutants close to those new TRI plants using data form EPA monitoring stations across the country.

We start by evaluating the impact of opening toxic emitting plants on executives working at S&P 1500 firms located within one (or two) miles of those new plants. Thus, we compute the effect of new toxic-pollutant-emitting plants (TRI plant openings) on the proportion of executives that leave a neighbouring S&P 1500 firm within one or two years. To go beyond correlation, we use several strategies to isolate the causal impact of toxic emissions on executive migration.

We discover that TRI plant openings trigger substantial increases in executive migration from neighbouring firms. For example, if one TRI plant opens within one mile of an S&P 1500 firm, the proportion of executives who leave during the next year rises by 4.2%, which is large since only 12% of executives leave the average firm each year.

Several tests suggest that these results are driven by the impact of pollution on executives. First, since the density of air pollution dissipates with distance from the source of the pollution, we should find – if the results are driven by the impact of pollution on executives – that TRI plant openings exerts a greater effect on executive departures when the plant is closer to the firm. This is what we find.

Second, if the results are caused by executives escaping pollution, then we should not find any effect from TRI plant openings on executives who do not typically work at the S&P 1500 firm’s headquarters near the new TRI plant. Again, this is what we find.

Third, if exposure to pollution causes executives to leave, then we should not find executive migration from S&P 1500 firms in response to non-TRI plant openings. That is, if migration is caused by pollution emitted by TRI plant openings and not by some other factor associated with new plant formation, then the opening of non-TRI plants should not trigger executive migration from geographically close firms. That is what we find.

Fourth, we were concerned that TRI plant openings might be more likely to occur around failing S&P 1500 firms and failing firms are more likely to fire executives. This is not the case.

Finally, if pollution drives executive migration, then we should see executives moving to firms located in cleaner communities. This is what we find.

All of the results point to the view that TRI plant openings – and the resultant exposure to toxic pollution – induces executives to leave the neighbouring firm.

To further isolate the causal effect of toxic emissions on executive departures, we differentiate among executives within the same firm by the degree to which they have general human capital skills – skills that are valued by other firms – or firm-specific human capital – skills that are most highly valued by the firms in which they are currently employed. Executives with more general human capital skills – and therefore executives that are likely to have comparatively appealing employment options in less polluted areas – should be more likely to escape from firms exposed to TRI plant openings than executives with more firm-specific skills. This is what we find: exposure to TRI plant openings induces greater migration of executives with more general human capital skills from neighbouring firms.

Finally, we show that these pollution-induced executive departures have adverse effects on the stock prices of the firms from which the executives separate. Firms’ cumulative abnormal returns fall markedly when executives announce their departures following the opening of nearby TRI plants.

Our examination relates to research on the degree to which people ‘vote with their feet’. Past work shows that US state corporate taxes shape the migration of star scientists and businesses. Past work also shows that differences in personal income-tax rates influence the international migration of highly skilled individuals. We show that executives also vote with their feet, leaving firms to avoid unhealthy air.

Our work also contributes to research on the political economy of environmental regulations. Corporations exposed to the toxic emissions from other firms lose talented individuals and suffer stock-price declines. These costs could factor into cost-benefit assessments of environmental regulations and the formation of corporate interest groups favouring stricter environmental laws.

References

American Lung Association (2019), State of the air 2019.

Becker, R, and V Henderson (2000), “Effects of air quality regulations on polluting industries”, Journal of Political Economy 108(2): 379–421.

Chen, S, P Oliva and P Zhang (2017), “The effect of air pollution on migration: Evidence from China”, NBER Working Paper 24036.

Currie, J, and M Neidell (2005), “Air pollution and infant health: What can we learn from California’s recent experience?”, The Quarterly Journal of Economics 120(3): 1003–30.

Greenstone, M (2002), “The impacts of environmental regulations on industrial activity: Evidence from the 1970 and 1977 Clean Air Act amendments and the Census of Manufactures”, Journal of Political Economy 110(6): 1175–219.

Isen, A, M Rossin-Slater and W R Walker (2017), “Every breath you take – every dollar you’ll make: The long-term consequences of the Clean Air Act of 1970”, Journal of Political Economy 125(3): 848–902.

Levine, R, C Lin and Z Wang (2020), “Pollution and human capital migration: Evidence from corporate executives”, NBER Working Paper 24389.

World Health Organization (2016), Ambient air pollution: A global assessment of exposure and burden of disease.

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Topics:  Environment Productivity and Innovation

Tags:  businesses, clean air, environment, executives, pollution, US

Willis H. Booth Chair in Banking and Finance, Haas School of Business, University of California, Berkeley

Chair of Finance and Stelux Professor in Finance, University of Hong Kong

Assistant Professor of Finance, University of Hong Kong

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