Communalizing private costs: Ownership concentration, institutions, and corporate environmental performance

Abstract

Research Summary

We extend the property rights theory to show that stronger ownership control incentivizes owners to push for communalizing private environmental costs unless counterbalancing internal and external governance mechanisms are prevalent. Using a sample of 16,286 observations for 3275 firms across 43 countries between 2008 and 2017, we find robust evidence for a negative effect of ownership concentration on corporate environmental performance (CEP). However, we find that ownership concentration has a diametrically opposite effect in strong and weak governance contexts. In the presence of strong external (regulatory institutions) and internal (high board independence) governance, ownership concentration improves CEP. In contrast, it has the opposite effect in the presence of weak regulatory institutions and low board independence. We contribute to the open system logic of corporate governance for environmental sustainability.

Managerial Summary

Our study shows that ownership concentration negatively impacts corporate environmental performance in the form of increased resource usage, emissions, and ESG controversies. This finding implies that there is a tussle over who bears environmental costs (i.e., privatized to the firms or communalized to the larger stakeholder bodies). However, we find that this negative performance outcome can be successfully mitigated by the quality of external (regulatory institutions) and internal governance (high board independence) mechanisms. Our study informs policymakers regarding the governance mechanisms through which the interests of the environment can be sincerely safeguarded in the face of short-term value-maximizing pressures from investors. These results also inform other stakeholders on how to nudge delinquent firms toward improving their CEP.