Meet, Beat, and Pollute

Recent research suggests managerial short-termism is associated with lower corporate sustainability, measured by environmental, social, and governance (ESG) ratings and sustainable institutional ownership. Using plant-level data on toxic releases from the United States Environmental Protection Agency (US EPA), we first show that US firms that meet or just beat consensus EPS forecasts (indicating short-termism) release significantly more toxins because they cut pollution abatement costs to boost earnings. Next, we investigate whether the positive relation between meeting benchmarks and pollution is attenuated for environmentally sustainable firms. To our surprise, we find that it is higher for firms with higher ESG ratings (E more than S and G) and higher environmentally sustainable institutional ownership. In addition to contributing to the real earnings management literature by documenting a negative externality of financial reporting incentives on the environment and society, our paper contributes to the ESG literature by showing a positive link between measures of corporate sustainability and managerial short-termism