Environmental regulations, agency costs, and firm performance

We investigate whether environmental regulation reduce agency costs. We find that increases in environmental restrictions decrease liquidity and increase financial constraints. In addition, it increases the likelihood of the firms being acquired or delisted from the exchanges. Such adverse outcomes should lead the shareholders into taking actions that mitigate these risks. We notice that shareholders restructure the board of directors and incentivize CEOs with more stock ownership. These actions, in turn, reduce agency costs and lead to increases in future profitability for these firms.