Exploring financial and governance drivers of environmental noncompliance

Using data from the U.S. Environmental Protection Agency (EPA), we examine the determinants of corporate environmental noncompliance and find that profitability is associated with lower noncompliance, whereas proxies for ability to pay, cash holdings and interest coverage, as well as leverage, are associated with higher noncompliance rates. Large, financially healthy firms exhibit a higher probability of noncompliance. We further find that firms carrying directors’ and officers’ (D&O) insurance have higher noncompliance rates and are more likely to reoffend, particularly when executives receive incentive‑based compensation. Furthermore, monetary penalties imposed by regulators are relatively small and therefore do not deter violations. Our results, which remain robust after addressing potential endogeneity concerns, have implications for inspectors, regulators, and policy makers, as well as investors and other stakeholders.