Pollution control bonds and overinvestment in utility companies: Does ownership matter?

Naima Lassoued (), Imen Khanchel and Cyrine Khiari
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Naima Lassoued: Manouba University Tunisia
Imen Khanchel: Manouba University Tunisia
Cyrine Khiari: Manouba University Tunisia

Economia e Politica Industriale: Journal of Industrial and Business Economics, 2024, vol. 51, issue 2, No 10, 517-539

Abstract: Abstract This study investigates whether pollution control bonds (PCB) affect overinvestment in utilityfirms and whether public ownership moderates this relationship. Based on a sample of 173U.S.utility companies observed from 2011to 2022, we, firstly, find a negative association between PCB and overinvestment, suggesting that PCBs are effective in curbing overinvestment. This implies that firms utilizing PCBs exhibit a reduced tendency toward excessive engagement in projects with a negative net present value, suggesting the efficacy of PCBs as a mechanism to reduce overinvestment. Secondly, we report that public ownership weakens the PCB effect on overinvestment, especially if it exceeds 50% of the capital. Our findings align with insights derived from agency theory. The use of PCBs acts as a monitoring and control mechanism, mitigating agency problems within utility firms. PCBs seem enhancing governance structures, aligning the interests of management with those of shareholders. Consequently, these bonds contribute to more efficient management of free cash flow, reducing the agency costs associated with overinvestment. However, the public ownership does not significantly contribute to monitoring and resolving conflicts of interest within utility firms. This suggests that, despite public ownership's potential governance role, the effectiveness of PCBs in mitigating overinvestment is compromised in publicly owned utility firms.

Keywords: Pollution control bonds; Overinvestment; Utilities; Publicly owned utilities (search for similar items in EconPapers)
JEL-codes: G34 L52 Q52 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s40812-023-00289-7

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