Events

This paper aims to show the role of the public as corporate stakeholder by examining the financial reporting of polluting firms. Because pollution damages the living environment of the public, the public “invests”, though passively, their health and life quality into polluting firms and thus essentially is a stakeholder of polluting firms. I argue that polluting firms have incentives to report lower profits to reduce the cost related to the pressure from the public over environmental issues. Using corporate toxic release data, I find that polluting firms are more likely to engage in income-decreasing earnings management when their toxic release increases. Importantly, the effect is stronger for toxic release produced by plants located in states where residents are more likely to pressure firms for lower pollution, suggesting that the public plays an important role. Further, the effect is stronger for toxic release subject to stricter regulatory monitoring, for firms with higher media coverage, and for firms in consumer product industries. However, the public still plays a role after the influences of regulators, the media, and customers are controlled for.