To Treat or Prevent Pollution?

This paper investigates the effect of financial constraints on pollution abatement methods. Using unique plant-level data from the French manufacturing sector between 2011 and 2018, I provide strong evidence that capital constraints discourage pollution prevention and have no impact on pollution treatment without environmental laws. First, financially constrained firms are less likely to invest in pollution prevention but not in pollution treatment. Second, by applying a staggered difference-in-differences methodology, I find that a negative shock to firms’ cash flows reduces the amount spent on pollution prevention. Finally, my results show that financially constrained firms increase their investments in pollution treatment relative to unconstrained firms after the implementation of an environmental regulation. Overall, my findings suggest that financial constraints lead to reduced pollution prevention and encourage treatment when environmental laws are enforced