This paper proposes and tests the hypothesis that common ownership of nearby firms, which I call geographic common ownership, incentivizes firms to internalize environmental externalities. Using US EPA Toxic Release Inventory data from 1987 to 2019, I find that facilities sharing significant common institutional ownership with nearby firms tend to release fewer toxic chemicals, compared to other facilities of the same parent firm. An analysis using mergers of financial institutions as a quasi-natural experiment suggests that the effect of geographic common ownership on toxic pollution is causal. Consistent with the idea that common owners internalize pollution externalities across their portfolio firms, mutual funds with larger ownership stakes in the area of a facility are more likely to vote in favor of shareholder-sponsored environmental proposals at the facility’s parent firm. Collectively, my findings highlight the potential role of common ownership in overcoming market failures pertaining to environmental externalities.
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environmental externality