Skip to main content
SpringerLink
Log in

Does CEO Risk-Aversion Affect Carbon Emission?

  • Original Paper
  • Published:
Journal of Business Ethics Aims and scope Submit manuscript

Abstract

Does CEO tolerance to risk affect a firm’s long-run sustainability? Using CEO insider debt holding, we show that CEO’s risk-aversion encourages immoral yet rational decisions of emitting more greenhouse gas thereby adversely affecting the firm’s long-run sustainability. Our result is robust to several endogeneity tests including a quasi-natural experiment. Our finding also suggest that to mitigate potential adverse reactions from stakeholders, carbon emitting firms with risk-averse CEOs tend to spend more on CSR activities. Much of the heterogeneity in our results are attributed to companies with weaker governance, powerful CEOs, and operating in a competitive product market. Overall, contrary to conventional wisdom, CEO preference toward risk-aversion can often lead to unethical outcomes (environmental degradation) and especially appears to be a key determinant for firm-level carbon emissions.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. According to the US Environmental Protection Agency (EPA), 76% of greenhouse gas emissions come from CO2 (https://www.epa.gov/ghgemissions/global-greenhouse-gas-emissions-data).

  2. For instance, the mounting pressure from pension funds, one of the strongest institutional ownership blocks, is gradually forcing corporations to reduce GHG emissions in the future. Four pension funds—APG Asset Management and PGGM (both from the Netherlands), British Columbia Investment Management Corporation (Canada), and Australian Super (Australia)—with a total asset under management of $1 trillion, have initiated an online tool that will gauge corporate green scores against the UN sustainable development goals for 8000 companies.

    (https://www.bloombergquint.com/onweb/global-pension-giants-start-green-investing-tool-to-rank-firms).

  3. For instance, Jung et al. (2018) and Herbohn et al. (2019) find that GHG-emitting firms pay the higher cost of debt, while Matsumura et al. (2014) show that every additional thousand metric tons of carbon emissions causes an average decrease of $212,000 of the market value of US carbon-emitting firms.

  4. At the macro-level, many climate scientists have been urging countries worldwide, and in particularly developed ones, to reach net-zero greenhouse gas emissions by 2050 (e.g., Millar et al., 2017). However, of the 184 signatory countries to the Paris Agreement, only 12% are capable of meeting the milestone of reducing GHG emissions by 50% in 2030 (Burki et al., 2021).

  5. See, for instance, Wang et al. (2010), Chava et al. (2010), Tung and Wang (2012), Cassell et al. (2012), Belkhir and Boubaker (2013), Anantharaman et al. (2014), Phan (2014), Bolton et al. (2015), Eisdorfer et al. (2015),Boubaker et al. (2020), Bhabra et al., (2021).

  6. See Garriga and Melé (2004) for a review of the theoretical literature on CSR. See Malik (2015) for a review of the empirical literature on CSR.

  7. Source: https://www.pwc.com/gx/en/news-room/press-releases/2019/ceo-turnover-record-high.html

  8. That includes a lower cost of equity (Dhaliwal et al., 2011; El Ghoul et al., 2011 and 2018), a lower cost of debt (Goss and Roberts 2011), improved access to financial capital (Attig et al., 2014), a better market valuation (Bae et al., 2019; Boubakri et al., 2016), easier access to credit (Cheng et al., 2014), a better credit rating (Attig et al., 2013), better governance (Attig et al., 2016; El Ghoul et al., 2016 & 2019), a lower risk of a stock price crash (Kim et al., 2014), more corporate innovation (Chkir et al., 2021), an enhanced reputation (Cui et al., 2018), a better performance in the post-merger period (Deng et al., 2013), and better relationships with the policymakers (Brown et al., 2006).

  9. We would like to thank Lalitha Naveen for sharing the data.

  10. To mitigate the concern with the multicollinearity problem, we also check the variance inflation factor (VIF) of the variables included in the analysis. We find that the highest VIF is 2.56 for Tangibility, followed by 2.30 for Capex. The rest of the VIFs are below 1.93. The average is 1.54. These VIFs indicate that multicollinearity is not a concern for our analysis.

  11. This high vs. low split is in the same spirit as the theoretical studies by Jensen and Meckling (1976) and Edmans and Liu (2011) in that these authors report that the alignment of the capital structure of the CEO and the firm is the key.

  12. We thank an anonymous reviewer for suggesting these tests.

  13. The IRS noted that “Effective as of 2009, all plans must be in compliance with the final regulations, both in form and operation.” See http://www.irs.gov/businesses/corporations/nonqualified-deferred-compensation-audit-techniques-guide .

  14. Following Shen and Zhang (2020), we use a match within a caliper of 1%.

  15. We thank an anonymous reviewer for motivating us to undertake this test.

  16. Though we follow the Lins et al. (2017) methodology in calculating our CSR score, our results are qualitatively similar when using the Deng et al. (2013) method of calculating CSR scores.

  17. Some recent studies show that higher CIDH is associated with higher CSR scores (Kim et al., 2020; Wu and Lin, 2019). Before we started to test the moderating influence of CSR on the CIDH-GHG relation, we ensured that our sample held the positive association between CIDH and CSR as found in the recent literature. In untabulated results, we find that CEORELDE is positively related to the CSR score (coefficient for CEORELDE = 0.0263; p < 0.10); the same is true when we use CEODE as a proxy for CIDH.

References

  • Adam, A. M., & Schwartz, M. S. (2009). Corporate governance, ethics, and the backdating of stock options. Journal of Business Ethics, 85(1), 225–237.

    Article  Google Scholar 

  • Adams, R. B., & Ferreira, D. (2007). A theory of friendly boards. The Journal of Finance, 62(1), 217–250.

    Article  Google Scholar 

  • Akey, P., & Appel, I. (2021). The limits of limited liability: Evidence from industrial pollution. The Journal of Finance, 76(1), 5–55.

    Article  Google Scholar 

  • Anantharaman, D., Fang, V. W., & Gong, G. (2014). Inside debt and the design of corporate debt contracts. Management Science, 60(5), 1260–1280.

    Article  Google Scholar 

  • Anton, W., Deltas, G., & Khanna, M. (2004). Incentives for environmental self-regulation and implications for toxic releases. Journal of Environmental Economics and Management, 48(1), 632–654.

    Article  Google Scholar 

  • Attig, N., El Ghoul, S., Guedhami, O., & Suh, J. (2013). Corporate social responsibility and credit ratings. Journal of Business Ethics, 117(4), 679–694.

    Article  Google Scholar 

  • Attig, N., Cleary, S. W., El Ghoul, S., & Guedhami, O. (2014). Corporate legitimacy and investment–cash flow sensitivity. Journal of Business Ethics, 121(2), 297–314.

    Google Scholar 

  • Attig, N., Boubakri, N., El Ghoul, S., & Guedhami, O. (2016). Firm internationalization and corporate social responsibility. Journal of Business Ethics, 134(2), 171–197.

    Article  Google Scholar 

  • Azar, J., Duro, M., Kadach, I., & Ormazabal, G. (2021). The big three and corporate carbon emission around the world. Journal of Financial Economics, forthcoming.

  • Bae, K. H., El Ghoul, S., Guedhami, O., Kwok, C. C., & Zheng, Y. (2019). Does corporate social responsibility reduce the costs of high leverage? Evidence from capital structure and product market interactions. Journal of Banking & Finance, 100(March), 135–150.

    Article  Google Scholar 

  • Baldenius, T., Melumad, N., & Meng, X. (2014). Board composition and CEO power. Journal of Financial Economics, 112(1), 53–68.

    Article  Google Scholar 

  • Barnea, A., & Rubin, A. (2010). Corporate social responsibility as a conflict between shareholders. Journal of Business Ethics, 97(1), 71–86.

    Article  Google Scholar 

  • Bartram, J., Brocklehurst, C., Bradley, D., Muller, M., & Evans, B. (2018). Policy review of the means of implementation targets and indicators for the sustainable development goal for water and sanitation. NPJ Clean Water., 1(1), 1–5.

    Article  Google Scholar 

  • Bebchuk, L. A., Fried, J. M., & Walker, D. I. (2002). Managerial power and rent extraction in the design of executive compensation. The University of Chicago Law Review, 69(3), 751–846.

    Article  Google Scholar 

  • Bebchuk, L. A., & Fried, J. M. (2003). Executive compensation as an agency problem. Journal of Economic Perspectives, 17(3), 71–92.

    Article  Google Scholar 

  • Bebchuk, L. A., & Jackson Jr, R. J. (2005). Executive pensions (No. w11907). National Bureau of Economic Research.

  • Bebchuk, L., Cohen, A., & Ferrell, A. (2009). What matters in corporate governance? The Review of Financial Studies, 22(2), 783–827.

    Article  Google Scholar 

  • Bebchuk, L. A., Cremers, K. M., & Peyer, U. C. (2011). The CEO pay slice. Journal of Financial Economics, 102(1), 199–221.

    Article  Google Scholar 

  • Beck, U. (2009). World at risk. Cambridge, UK: Cambridge: Polity Press.

  • Belkhir, M., & Boubaker, S. (2013). CEO inside debt and hedging decisions: Lessons from the U.S. banking industry. Journal of International Financial Markets, Institutions and Money, 24, 223–246.

    Article  Google Scholar 

  • Benlemlih, M., & Bitar, M. (2018). Corporate social responsibility and investment efficiency. Journal of Business Ethics, 148(3), 647–671.

    Article  Google Scholar 

  • Berrone, P., & Gomez-Mejia, L. R. (2009). Environmental performance and executive compensation: an integrated agency-institutional perspective. The Academy of Management Journal, 52(1).

  • Bertrand, M., & Mullainathan, S. (2001). Are CEOs rewarded for luck? The ones without principals are. The Quarterly Journal of Economics, 116(3), 901–932.

    Article  Google Scholar 

  • Besio, C., & Pronzini, A. (2014). Morality, ethics, and values outside and inside organizations: An example of the discourse on climate change. Journal of Business Ethics, 119(3), 287–300.

    Article  Google Scholar 

  • Bhabra, G. S., Bhabra, H. S., & Hossain, A. T. CEO inside debt and the acquisition of private targets. Accounting & Finance, forthcoming.

  • Bolton, P., & Kacperczyk, M. T. (2021). Do investors care about carbon risk? Journal of Financial Economics, in press.

  • Bolton, P., Mehran, H., & Shapiro, J. (2015). Executive compensation and risk taking. Review of Finance, 19(6), 2139–2181.

    Article  Google Scholar 

  • Boiral, O., Henri, J.-F., & Talbot, D. (2012). Modeling the impacts of corporate commitment on climate change. Business Strategy and the Environment, 21(8), 495–516.

    Article  Google Scholar 

  • Boubaker, S., Chebbi, K., & Grira, J. (2020). Top management insider debt and corporate social responsibility? Evidence from the US. Quarterly Review of Economics and Finance, 78(November), 98–115.

    Article  Google Scholar 

  • Boubakri, N., El Ghoul, S., Wang, H., Guedhami, O., & Kwok, C. C. (2016). Cross-listing and corporate social responsibility. Journal of Corporate Finance, 41(December), 123–138.

    Article  Google Scholar 

  • Branco, M. C., & Rodrigues, L. L. (2006). Corporate social responsibility and resource-based perspectives. Journal of Business Ethics, 69(2), 111–132.

    Article  Google Scholar 

  • Brogaard, J., Li, D., & Xia, Y. (2017). Stock liquidity and default risk. Journal of Financial Economics, 124(3), 486–502.

    Article  Google Scholar 

  • Brown, W. O., Helland, E., & Smith, J. K. (2006). Corporate philanthropic practices. Journal of Corporate Finance, 12(5), 855–877.

    Article  Google Scholar 

  • Brown, J. A., & Forster, W. R. (2013). CSR and stakeholder theory: A tale of Adam Smith. Journal of Business Ethics, 112(2), 301–312.

    Article  Google Scholar 

  • Burki, U., Azid, T., and Dahlstrom, R.F. (2021). Foundations of a sustainable economy: Moral, ethical and religious perspectives. Milton Park, Abingdon: Taylor & Francis Ltd. Online access: http://public.eblib.com.qe2a-proxy.mun.ca/choice/PublicFullRecord.aspx?p=6662625

  • Cain, M. D., & McKeon, S. B. (2016). CEO personal risk-taking and corporate policies. Journal of Financial and Quantitative Analysis, 51(1), 139–164.

    Article  Google Scholar 

  • Capasso, G., Gianfrate, G., & Spinelli, M. (2020). Climate change and credit risk. Journal of Cleaner Production, 121634, 266(1), in press.

  • Cassell, C. A., Huang, S. X., Sanchez, J. M., & Stuart, M. D. (2012). Seeking safety: The relation between CEO inside debt holdings and the riskiness of firm investment and financial policies. Journal of Financial Economics, 103(3), 588–610.

    Article  Google Scholar 

  • Chakraborty, A., Sheikh, S., & Subramanian, N. (2007). Termination risk and managerial risk taking. Journal of Corporate Finance, 13(1), 170–188.

    Article  Google Scholar 

  • Chapple, L., Clarkson, P. M., & Gold, D. L. (2013). The cost of carbon: Capital market effects of the proposed Emission Trading Scheme (ETS). Abacus, 49(1), 1–33.

    Article  Google Scholar 

  • Chatterji, A. K., & Toffel, M. W. (2010). How firms respond to being rated. Strategic Management Journal, 31(9), 917–945.

    Google Scholar 

  • Chava, S., Kumar, P., & Warga, A. (2010). Managerial agency and bond covenants. The Review of Financial Studies, 23(3), 1120–1148.

    Article  Google Scholar 

  • Chen, L., & Gao, L. (2012). The pricing of climate risk. Journal of Financial and Economic Practice, 12(2), 115–131.

    Google Scholar 

  • Cheng, Q., & Warfield, T. D. (2005). Equity incentives and earnings management. The Accounting Review, 80(2), 441–476.

    Article  Google Scholar 

  • Cheng, B., Ioannou, I., & Serafeim, G. (2014). Corporate social responsibility and access to finance. Strategic Management Journal, 35(1), 1–23.

    Article  Google Scholar 

  • Chkir, I., El Haj Hassan, B., Rjiba, H. & Saadi, S. (2021). Does corporate social responsibility influence corporate innovation? International evidence. Emerging Markets Review, 46(C).

  • Chi, S., Huang, S. X., & Sanchez, J. M. (2017). CEO inside debt incentives and corporate tax sheltering. Journal of Accounting Research, 55(4), 837–876.

    Article  Google Scholar 

  • Cho, C. H., & Patten, D. M. (2007). The role of environmental disclosures as tools of legitimacy: A research note. Accounting, Organizations and Society, 32(7–8), 639–647.

    Article  Google Scholar 

  • Cho, C. H., Patten, D. M., & Roberts, R. W. (2006). Corporate political strategy: An examination of the relation between political expenditures, environmental performance, and environmental disclosure. Journal of Business Ethics, 67(2), 139–154.

    Article  Google Scholar 

  • Cohen, R. B., Hall, B. J., & Viceira, L. M. (2000). Do executive stock options encourage risk-taking. Unpublished manuscript, Harvard University.

  • Coles, J. L., Daniel, N. D., & Naveen, L. (2006). Managerial incentives and risk-taking. Journal of Financial Economics, 79(2), 431–468.

    Article  Google Scholar 

  • Collins, D. W., & Hribar, P. (2000). Earnings-based and accrual-based market anomalies: One effect or two? Journal of Accounting and Economics, 29(1), 101–123.

    Article  Google Scholar 

  • Core, J., & Guay, W. (1999). The use of equity grants to manage optimal equity incentive levels. Journal of Accounting and Economics, 28(2), 151–184.

    Article  Google Scholar 

  • Core, J. E., Holthausen, R. W., & Larcker, D. F. (1999). Corporate governance, chief executive officer compensation, and firm performance. Journal of Financial Economics, 51(3), 371–406.

    Article  Google Scholar 

  • Cowan, S., & Deegan, C. (2011). Corporate disclosure reactions to Australia’s first national emission reporting scheme. Accounting & Finance, 51(2), 409–436.

    Article  Google Scholar 

  • Crane, A., Matten, D., & Moon, J. (2008). Ecological citizenship and the corporation: Politicizing the new corporate environmentalism. Organization & Environment, 21(4), 371–389.

    Article  Google Scholar 

  • Crisp, R. (Ed.). (2014). Aristotle: Nicomachean ethics. Cambridge University Press.

    Google Scholar 

  • Cui, J., Jo, H., & Na, H. (2018). Does corporate social responsibility affect information asymmetry? Journal of Business Ethics, 148(3), 549–572.

    Article  Google Scholar 

  • Deng, X., Kang, J. K., & Low, B. S. (2013). Corporate social responsibility and stakeholder value maximization: Evidence from mergers. Journal of Financial Economics, 110(1), 87–109.

    Article  Google Scholar 

  • Dhaliwal, D. S., Li, O. Z., Tsang, A., & Yang, Y. G. (2011). Voluntary nonfinancial disclosure and the cost of equity capital: The initiation of corporate social responsibility reporting. The Accounting Review, 86(1), 59–100.

    Article  Google Scholar 

  • Duanmu, J.-L., Bu, M., & Pittman, R. (2018). Does market competition dampen environmental performance? Evidence from China. Strategic Management Journal, 39(11), 3006–3030.

    Article  Google Scholar 

  • Eberlein, B., & Matten, D. (2009). Business responses to climate change regulation in Canada and Germany: Lessons for MNCs from emerging economies. Journal of Business Ethics, 86(2), 241–255.

    Article  Google Scholar 

  • Edmans, A., & Liu, Q. (2011). Inside debt. The Review of Finance, 15(1), 75–102.

    Article  Google Scholar 

  • Eisdorfer, A., Giaccotto, C., & White, R. (2015). Do corporate managers skimp on shareholders’ dividends to protect their own retirement funds? Journal of Corporate Finance, 30(February), 257–277.

    Article  Google Scholar 

  • El Ghoul, S., Guedhami, O., Kwok, C. C., & Mishra, D. R. (2011). Does corporate social responsibility affect the cost of capital? Journal of Banking & Finance, 35(9), 2388–2406.

    Article  Google Scholar 

  • El Ghoul, S., Guedhami, O., Wang, H., & Kwok, C. C. (2016). Family control and corporate social responsibility. Journal of Banking & Finance, 73(December), 131–146.

    Article  Google Scholar 

  • El Ghoul, S., Guedhami, O., Kim, H., & Park, K. (2018). Corporate environmental responsibility and the cost of capital: International evidence. Journal of Business Ethics, 149(2), 335–361.

    Article  Google Scholar 

  • El Ghoul, S., Guedhami, O., Nash, R., & Patel, A. (2019). New evidence on the role of the media in corporate social responsibility. Journal of Business Ethics, 154(4), 1051–1079.

    Article  Google Scholar 

  • Ernst & Young. (2010). Action amid uncertainty: The business response to climate change, p. 28.

  • Fama, E. F. (1980). Agency problems and the theory of the firm. Journal of Political Economy, 88(2), 288–307.

    Article  Google Scholar 

  • Favotto, A. and Kollman, K. (2015) Corporate social responsibility in an era of economic crisis: Empty gesture or tool for corporate learning? Working Paper, London School of Economics.

  • Fisher-Vanden, K., & Thorburn, K. S. (2011). Voluntary corporate environmental initiatives and shareholder wealth. Journal of Environmental Economics and Management, 62(3), 430–445.

    Article  Google Scholar 

  • Garriga, E., & Melé, D. (2004). Corporate social responsibility theories: Mapping the territory. Journal of Business Ethics, 53(1–2), 51–71.

    Article  Google Scholar 

  • Garvey, G. T., Iyer, M., & Nash, J. (2018). Carbon footprint and productivity: Does the" E" in ESG capture efficiency as well as environment? Journal of Investment Management, 16(1), 59–69.

    Google Scholar 

  • Gaspar, J. M., & Massa, M. (2006). Idiosyncratic volatility and product market competition. The Journal of Business, 79(6), 3125–3152.

    Article  Google Scholar 

  • Gerakos, J. (2010). CEO pensions: Disclosure, managerial power, and optimal contracting. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=982180

  • Goetz, M. (2019). Financing conditions and toxic emission. SAFE working paper No. 254.

  • Goss, A., & Roberts, G. S. (2011). The impact of corporate social responsibility on the cost of bank loans. Journal of Banking & Finance, 35(7), 1794–1810.

    Article  Google Scholar 

  • Göx, R. F., & Hemmer, T. (2020). On the relation between managerial power and CEO pay. Journal of Accounting and Economics, in press.

  • Gow, I. D., Ormazabal, G., & Taylor, D. J. (2010). Correcting for cross-sectional and time-series dependence in accounting research. The Accounting Review, 85(2), 483–512.

    Article  Google Scholar 

  • Grant, J., Markarian, G., & Parbonetti, A. (2009). CEO Risk-related incentives and income smoothing. Contemporary Accounting Research, 26(4), 1029–1065.

    Article  Google Scholar 

  • Haigh, N., & Griffiths, A. (2009). The natural environment as a primary stakeholder: The case of climate change. Business Strategy and the Environment, 18(6), 347–359.

    Article  Google Scholar 

  • Härtel, C. E., & Pearman, G. I. (2010). Understanding and responding to the climate change issue: Towards a whole-of-science research agenda. Journal of Management and Organization, 16(1), 16–47.

    Article  Google Scholar 

  • Hasan, M. M., Hossain, A. T., & Hossain, T. (2021a). CEO inside debt holdings and credit ratings. Working paper.

  • Hasan, M. M., Hossain, A. T., & Hossain, T. (2021b). CEO inside debt holdings and trade credit. Accounting & Finance. https://doi.org/10.1111/acfi.12901.

    Article  Google Scholar 

  • Herbohn, K., Gao, R., & Clarkson, P. (2019). Evidence on whether banks consider carbon risk in their lending decisions. Journal of Business Ethics, 158(1), 155–175.

    Article  Google Scholar 

  • Hermalin, B. E., & Weisbach, M. S. (1998). Endogenously chosen boards of directors and their monitoring of the CEO. American Economic Review, 88(1), 96–118.

    Google Scholar 

  • Hirshleifer, D., Low, A., & Teoh, S. H. (2012). Are overconfident CEOs better innovators? The Journal of Finance, 67(4), 1457–1498.

    Article  Google Scholar 

  • Hoberg, G., Phillips, G., & Prabhala, N. (2014). Product market threats, payouts, and financial flexibility. The Journal of Finance, 69(1), 293–324.

    Article  Google Scholar 

  • Hoberg, G., & Phillips, G. (2016). Text-based network industries and endogenous product differentiation. Journal of Political Economy, 124(5), 1423–1465.

    Article  Google Scholar 

  • Hoffman, A. J. (2005). Climate change strategy: The business logic behind voluntary greenhouse gas reductions. California Management Review, 47(3), 21–46.

    Article  Google Scholar 

  • Hoffman, A. J. (2006). Getting ahead of the curve: Corporate strategies that address climate change. Arlington, VA: The Pew Center on Global Climate Change.

  • Hoi, C. K. S., Wu, Q., & Zhang, H. (2019). Does social capital mitigate agency problems? Evidence from Chief Executive Officer (CEO) compensation. Journal of Financial Economics, 133(2), 498–519.

    Article  Google Scholar 

  • Homroy, S., & Slechten, A. (2019). Do board expertise and networked boards affect environmental performance? Journal of Business Ethics, 158(1), 269–292.

    Article  Google Scholar 

  • Hossain, A. T., Hossain, T., & Kryzanowski, L. (2021). Political corruption and corporate payouts. Journal of Banking & Finance, 123, 106016. https://doi.org/10.1016/j.jbankfin.2020.106016.

    Article  Google Scholar 

  • In, Soh Young and Park, Ki Young and Monk, Ashby (2017). Is 'Being Green' Rewarded in the Market? An Empirical Investigation of Decarbonization and Stock Returns. Stanford Global Project Center Working Paper. https://ssrn.com/abstract=3020304

  • Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.

    Article  Google Scholar 

  • Jha, A., & Cox, J. (2015). Corporate social responsibility and social capital. Journal of Banking & Finance, 60(November), 252–270.

    Article  Google Scholar 

  • Jung, J., Herbohn, K., & Clarkson, P. (2018). Carbon risk, carbon risk awareness and the cost of debt financing. Journal of Business Ethics, 150(4), 1151–1171.

    Article  Google Scholar 

  • Kaplan, S. N., & Zingales, L. (1997). Do investment-cash flow sensitivities provide useful measures of financing constraints? The Quarterly Journal of Economics, 112(1), 169–215.

    Article  Google Scholar 

  • Kim, T., Kim, H. D., & Park, K. (2020). CEO inside debt holdings and CSR activities. International Review of Economics & Finance, 70(November), 508–529.

    Article  Google Scholar 

  • Kim, S. & Yoon, A. 2020. Analyzing active managers' commitment to ESG: Evidence from United Nations Principles for Responsible Investment. 2020. Working paper. https://ssrn.com/abstract=3555984

  • Kim, Y. B., An, H. T., & Kim, J. D. (2015). The effect of carbon risk on the cost of equity capital. Journal of Cleaner Production, 93(15), 279–287.

    Article  Google Scholar 

  • Kim, Y., Li, H., & Li, S. (2014). Corporate social responsibility and stock price crash risk. Journal of Banking & Finance, 43(June), 1–13.

    Google Scholar 

  • Kim, I., Wan, H., Wang, B., & Yang, T. (2019). Institutional investors and corporate environmental, social, and governance policies: evidence from toxics release data. Management Science, 65(10), 4901–4926.

    Article  Google Scholar 

  • Kolk, A., & Pinkse, J. (2007). Multinationals’ political activities on climate change. Business & Society, 46(2), 201–228.

    Article  Google Scholar 

  • Kolk, A., & Levy, D. (2001). Winds of change: Corporate strategy, climate change and oil multinationals. European Management Journal, 19(5), 501–509.

    Article  Google Scholar 

  • Lemmon, M., & Roberts, M. R. (2010). The response of corporate financing and investment to changes in the supply of credit. Journal of Financial and Quantitative Analysis, 45(3), 555–587.

    Article  Google Scholar 

  • Levy, D. L., & Egan, D. (2003). A neo-Gramscian approach to corporate political strategy: Conflict and accommodation in the climate change negotiations. Journal of Management Studies, 40(4), 803–829.

    Article  Google Scholar 

  • Li, D., Huang, M., Ren, S., Chen, X., & Ning, L. (2018). Environmental legitimacy, green innovation, and corporate carbon disclosure: Evidence from CDP China 100. Journal of Business Ethics, 150(4), 1089–1104.

    Article  Google Scholar 

  • Lins, K. V., Servaes, H., & Tamayo, A. (2017). Social capital, trust, and firm performance: The value of corporate social responsibility during the financial crisis. The Journal of Finance, 72(4), 1785–1824.

    Article  Google Scholar 

  • Liu, C. (2018). Are women greener? Corporate gender diversity and environmental violations. Journal of Corporate Finance, 52(October), 118–142.

    Article  Google Scholar 

  • Liu, Y., Mauer, D. C., & Zhang, Y. (2014). Firm cash holdings and CEO inside debt. Journal of Banking & Finance, 42(2), 83–100.

    Article  Google Scholar 

  • MacKay, B., & Munro, I. (2012). Information warfare and new organizational landscapes: An inquiry into the ExxonMobil–Greenpeace dispute over climate change. Organization Studies, 33(11), 1507–1536.

    Article  Google Scholar 

  • Malik, M. (2015). Value-enhancing capabilities of CSR: A brief review of contemporary literature. Journal of Business Ethics, 127(2), 419–438.

    Article  Google Scholar 

  • Masulis, R. W., & Mobbs, S. (2011). Are all inside directors the same? Evidence from the external directorship market. The Journal of Finance, 66(3), 823–872.

    Article  Google Scholar 

  • Matsumura, E. M., Prakash, R., & Vera-Muñoz, S. C. (2014). Firm-value effects of carbon emissions and carbon disclosures. The Accounting Review, 89(2), 695–724.

    Article  Google Scholar 

  • McMullin, J. L., & Schonberger, B. (2020). Entropy-balanced accruals. Review of Accounting Studies, 25(1), 84–119. https://doi.org/10.1007/s11142-019-09525-9.

    Article  Google Scholar 

  • Millar, R., Fuglestvedt, J., Friedlingstein, P., et al. (2017). Emission budgets and pathways consistent with limiting warming to 1.5 °C. Nature Geoscience, 10, 741–747.

    Article  Google Scholar 

  • Naaraayanan, S., Sachdeva, K., & Sharma, V. (2021). The real effect of environmental activists investing. SSRN working paper.

  • Newton, L. (2005). Business Ethics and the Natural Environment. Blackwell Publishing.

    Book  Google Scholar 

  • Northcott, M. S., & Aid, C. (2007). A moral climate: The ethics of global warming. London, England: Darton Longman & Todd.

  • Nyberg, D., & Wright, C. (2012). Justifying business responses to climate change: Discursive strategies of similarity and difference. Environment and Planning A, 44(8), 1819–1835.

    Article  Google Scholar 

  • Nyberg, D., Spicer, A., & Wright, C. (2013). Incorporating citizens: Corporate political engagement with climate change in Australia. Organization, 20(3), 433–453.

    Article  Google Scholar 

  • Okereke, C. (2007). An exploration of motivations, drivers and barriers to carbon management: The UK FTSE 100. European Management Journal, 25(6), 475–486.

    Article  Google Scholar 

  • Okereke, C., & Russel, D. (2010). Regulatory pressure and competitive dynamics: Carbon management strategies of UK energyintensive companies. California Management Review, 52(4), 100–124.

    Article  Google Scholar 

  • Ortiz-de-Mandojana, N., Aragón-Correa, J. A., Delgado-Ceballos, J., & Ferrón-Vílchez, V. (2012). The effect of director interlocks on firms’ adoption of proactive environmental strategies. Corporate Governance: An International Review, 20(2), 164–178.

    Article  Google Scholar 

  • Painter, M. (2020). An inconvenient cost: The effects of climate change on municipal bonds. Journal of Financial Economics, 135(2), 468–482.

    Article  Google Scholar 

  • Petersen, M. A. (2009). Estimating standard errors in finance panel data sets: Comparing approaches. The Review of Financial Studies, 22(1), 435–480.

    Article  Google Scholar 

  • Pinkse, J., & Kolk, A. (2009). Global climate change and business. Taylor & Francis.

    Book  Google Scholar 

  • Phan, H. V. (2014). Inside debt and mergers and acquisitions. Journal of Financial and Quantitative Analysis, 49(5–6), 1365–1401.

    Article  Google Scholar 

  • Pitcher, P., Chreim, S., & Kisfalvi, V. (2000). CEO succession research: Methodological bridges over troubled waters. Strategic Management Journal, 21(6), 625–648.

    Article  Google Scholar 

  • Prado-Lorenzo, J. M., & Garcia-Sanchez, I. M. (2010). The role of the board of directors in disseminating relevant information on greenhouse gases. Journal of Business Ethics, 97(3), 391–424.

    Article  Google Scholar 

  • Raghunandan, A. and Rajgopal, S. (2021). Do Socially Responsible Firms Walk the Talk? SRN: https://ssrn.com/abstract=3609056

  • Raheja, C. G. (2005). Determinants of board size and composition: A theory of corporate boards. Journal of Financial and Quantitative Analysis, 40(2), 283–306.

    Article  Google Scholar 

  • Rao, K., & Tilt, C. (2016). Board composition and corporate social responsibility: The role of diversity, gender, strategy and decision making. Journal of Business Ethics, 138(2), 327–347.

    Article  Google Scholar 

  • Rosenbaum, P. R., & Rubin, D. B. (1983). The central role of the propensity score in observational studies for causal effects. Biometrika, 70(1), 41–55. https://doi.org/10.1093/biomet/70.1.41.

    Article  Google Scholar 

  • Russo, A., & Perrini, F. (2010). Investigating stakeholder theory and social capital: CSR in large firms and SMEs. Journal of Business Ethics, 91(2), 207–221.

    Article  Google Scholar 

  • Schmidt, K. M. (1997). Managerial incentives and product market competition. The Review of Economic Studies, 64(2), 191–213.

    Article  Google Scholar 

  • Shapira, R. & Zingales, L. (2017). Is Pollution Value-Maximizing? The Dupont Case (September 2017). NBER Working Paper No. w23866. https://ssrn.com/abstract=3046380

  • Shen, C. H. H., & Zhang, H. (2020). What's good for you is good for me: The effect of CEO inside debt on the cost of equity. Journal of Corporate Finance, 64(October), in press.

  • Shivdasani, A., & Yermack, D. (1999). CEO involvement in the selection of new board members: An empirical analysis. The Journal of Finance, 54(5), 1829–1853.

    Article  Google Scholar 

  • Shive, S. A., & Forster, M. M. (2020). Corporate governance and pollution externalities of public and private firms. The Review of Financial Studies, 33(3), 1296–1330.

    Article  Google Scholar 

  • Solomon, R. C. (2004). Aristotle, ethics and business organizations. Organization Studies, 25(6), 1021–1043.

    Article  Google Scholar 

  • Srivastav, A., Armitage, S., & Hagendorff, J. (2014). CEO inside debt holdings and risk-shifting: Evidence from bank payout policies. Journal of Banking & Finance, 47(October), 41–53.

    Article  Google Scholar 

  • Sundaram, R. K., & Yermack, D. L. (2007). Pay me later: Inside debt and its role in managerial compensation. The Journal of Finance, 62(4), 1551–1588.

    Article  Google Scholar 

  • Talbot, D., & Boiral, O. (2015). Strategies for climate change and impression management: A case study among Canada’s large industrial emitters. Journal of Business Ethics, 132(2), 329–346.

    Article  Google Scholar 

  • Tung, F., & Wang, X. (2012). Bank CEOs, Inside Debt Compensation, and the Global Financial Crisis. Working Paper, Boston University.

  • Van Bekkum, S. (2016). Inside Debt and Bank Risk. Journal of Financial and Quantitative Analysis, 51(2), 359–385.

    Article  Google Scholar 

  • Walls, J., Berrone, P., & Phan, P. (2012). Corporate governance and environmental performance: Is there really a link? Strategic Management Journal, 33(8), 885–913.

    Article  Google Scholar 

  • Wang, C., Xie, F., Xin, X. (2010). Managerial ownership of debt and accounting conservatism. Working paper, Chinese University of Hong Kong.

  • Wang, C., Xie, F., & Xin, X. (2018). CEO inside debt and accounting conservatism. Contemporary Accounting Research, 35(4), 2131–2159.

    Article  Google Scholar 

  • Wei, C., & Yermack, D. (2011). Investor reactions to CEOs’ inside debt incentives. The Review of Financial Studies, 24(11), 3813–3840.

    Article  Google Scholar 

  • Winn, M., Kirchgeorg, M., Griffiths, A., Linnenluecke, M. K., & Günther, E. (2011). Impacts from climate change on organizations: A conceptual foundation. Business Strategy and the Environment, 20(3), 157–173.

    Article  Google Scholar 

  • Wooldridge, J. M. (2002). Econometric analysis of cross section and panel data. Cambridge, USA: MIT Press. Available at: http://fin.shufe.edu.cn/fe/Books%20&%20Links/Wooldridge%20Econometric%20analysis.pdf.

    Google Scholar 

  • Wu, T. H., & Lin, M. C. (2019). Relationship of CEO inside debt and corporate social performance: A data envelopment analysis approach. Finance Research Letters, 29(June), 308–314.

    Article  Google Scholar 

Download references

Acknowledgements

We specially thank Greg Shailer (the editor) and two anonymous reviewers for helping us improve the manuscript. We thank Walid Ben Amar, Gurmeet Bhabra, Harjeet Bhabra, Lamia Chourou, Imed Chkir, Sean Cleary, Sara Ding, Darlene Himick, Mostafa Hasan, Majidul Islam, Kose John, Jon Keller, Scott Linn, Xiaobing Ma, Abdullah Al Masum, Jinghua Nie, Hatem Rjjiba, Mingyue Zhang, and Ligang Zhong for their valuable comments on earlier version of the paper. We also thank seminar participants at Memorial University of Newfoundland for their comments. A. Hossain thanks Memorial University of Newfoundland and the Social Sciences and Humanities Research Council of Canada (SSHRC, Grant #430-2020-00275) for providing financial support. We thank William Schipper for his excellent copy editing work. We thank Meghraj Mukhopadhyay for his research assistance. All remaining errors are our own.

Author information

Authors and Affiliations

  1. Faculty of Business Administration, Memorial University of Newfoundland, St. John’s, NL, A1B 3X5, Canada

    Ashrafee Hossain

  2. Telfer School of Management, University of Ottawa, Ottawa, ON, K1N 6N5, USA

    Samir Saadi

  3. College of Business Administration, Central Michigan University, Mount Pleasant, MI, 48859, USA

    Abu S. Amin

  4. College of Business Administration, Gulf University for Science and Technology, West Mishref, 32093, Hawally, Kuwait

    Samir Saadi

Authors
  1. Ashrafee Hossain
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Samir Saadi
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Abu S. Amin
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Ashrafee Hossain.

Ethics declarations

Conflict of interest

The authors declare that they have no conflict of interest.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Electronic supplementary material

Below is the link to the electronic supplementary material.

Supplementary file1 (DOCX 96 kb)

Appendices

Appendix A

See Table 11.

Table 11 Variable definitions
Full size table

Appendix B: Agency intensity score

In this paper, we build an agency measure called Agency Intensity Score. This is basically an 8-point scale score consisting of eight commonly used proxies for agency. In financial economics literature, numerous proxies are used, ranging from one proxy to as many as four proxies in a given study. We have taken a more holistic approach and thus we have built this index. We believe it is not prone to cherry picking and gives attention to various agency proxies that are available. Following is the list of the variables:

(a) Residual free cash flow If a firm has above the median residual free cash flow then it gets one point toward the Agency Intensity Score (high residual free cash flow = high agency).

(b) Leverage If a firm has below the median leverage then it gets one point toward the Agency Intensity Score (low leverage = high agency).

(c) Dividend payout If a firm pays below the median level of dividend then it gets one point toward the Agency Intensity Score (low dividend payout = high agency).

(d) R&D If a firm has above the median level of R&D expenses then it gets one point toward the Agency Intensity Score (high R&D = high agency).

(e) Intangible assets If a firm has above the median level of intangible assets then it gets one point toward the Agency Intensity Score (high intangible assets = high agency).

(f) Board cooption If a firm’s board has above the median percentage of coopted directors (directors who were hired after the current CEO started in his/her position) then it gets one point toward the Agency Intensity Score (high board cooption = high agency).

(g) Board independence If a firm’s board has below the median percentage of independent directors (outside directors) then it gets one point toward the Agency Intensity Score (low board independence = high agency).

(h) Institutional ownership If a firm’s total institutional ownership in percentage is below the median then it gets one point toward the Agency Intensity Score (low institutional ownership = high agency).

Mathematically, a firm can score between 0 and 8 in the Agency Intensity Score scale with a higher score indicating a higher level of agency issues. The mean (median) of our sample is 3.89 (4) with a min (max) value of 0 (8).

Appendix C

See Table 12.

Table 12 Summary of tables
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Hossain, A., Saadi, S. & Amin, A.S. Does CEO Risk-Aversion Affect Carbon Emission?. J Bus Ethics 182, 1171–1198 (2023). https://doi.org/10.1007/s10551-021-05031-8

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10551-021-05031-8

Keywords

JEL Classification

Search

Navigation