Author:

Abstract:

Essays on the influence of environmental regulation on firms' strategies and value: the case of the EU ETS The three chapters in this dissertation chronologically exploit the unique regulatory environment created in Europe through the introduction of the EU ETS and investigate how firms interacted with the most developed multinational emission trading scheme to date. As such, the first chapter focusses on the cross-country regulatory heterogeneity that characterized the first two phases of the scheme. More specifically, it examines whether multinational enterprises (MNEs) opted to locate their foreign direct investment (FDI) projects in more environmentally lenient member states during Phase I (2005-2007) and Phase II (2008-2012) of the EU ETS. The results of this chapter highlight the existence of an intra-regional pollution haven effect (PHE). However, this effect is only observed for firms with high carbon costs, that have a low carbon efficiency or are lacking sufficient carbon allowances and are moreover limited in the strategic flexibility of their location choice. While prior research has already shown that multinationals exploit cross-country regulatory differences (i.e., arbitrage) and firms in developed countries shift their polluting activities to more environmentally lenient developing countries (i.e., pollution haven effect), our research provides several contributions to these strands of literature. First, the current academic literature predominantly examines the PHE from a developed vs developing perspective. Nevertheless, the overall institutional differences between these two types of countries can lead to confounding influences in this relationship. As such, by focusing on Europe, we are able to paint a much clearer picture on whether environmental regulation in particular can influence location choices. Furthermore, by including the interaction between firm-specific advantages and country-specific (dis)advantages induced by environmental regulation, we provide a possible explanation for the current ambiguity within the PHE research. Finally, from a policy perspective, with more and more cap-and-trade schemes being implemented at the (sub-)national level around the world (e.g., California in the U.S. or China), these findings are relevant for policy makers across the globe. The second chapter of this dissertation examines the valorization of carbon allowances in Phase III (2013-2020) of the EU ETS. Prior studies have failed to unequivocally find a positive effect of environmental performance on firm value for firms operating under the European Union Emission Trading Scheme. As this is often attributed to the overallocation of emission allowances in the first two phases of the scheme, we examine its third phase. At the start this phase, the structural oversupply of allowances transferred from the phase II kept decimating the carbon price and questions were raised regarding the efficacy of the scheme in influencing emission reductions. As a result, the EU unexpectedly decided to address this oversupply through the enforcement of various policy reforms in 2013. Inspired by a difference-in-difference model, we find that a lack of emission allowances is translated into lower firm value in phase III, even at low carbon prices. This negative impact on firm value is especially pronounced for firms that highly exposed to the renewed regulation. Our results are consistent with increased carbon risk in phase III of the EU ETS for underallocated firms. The third and final chapter of this dissertation focuses on the link between board gender diversity and environmental inefficiency under the EU ETS. As such, we exploit the exogenous and unexpected increase in carbon prices following the 2017 Argus Emissions Conference as quasi-natural experiment that brings about increased environmental costs and raises scrutiny to polluters. In particular, this chapter investigates whether environmental pressure can lead to social change in the upper echelons of the most polluting firms in Europe. Our findings show that board gender diversity augmented substantially in the post-Argus period for environmentally inefficient firms, especially when the firm was lacking overall diversity of thought. Moreover, the percentage of board gender diversity in these firms increased by replacing incumbent male members through highly qualified female board members. As such, these results counter the window dressing argument that these women would solely be present as a signal of social responsibility, but rather that they are appointed to trigger an environmental wind of change. While various papers have already examined whether better social performance -for instance through increased board gender diversity (Liu, 2018; Nuber & Velte, 2021)- can lead to higher environmental efficiency, this chapter is, to our knowledge, the first work that investigates this mechanism the other way around. These findings are also intriguing for regulators. Given that stringent environmental regulation can trigger heightened levels of board gender diversity, this provides interesting avenues for policy makers to simultaneously achieve both environmental and social objectives.