We investigate two related questions about the trade-off between the short-term pressures on managers to meet earnings targets and the long-term environmental benefits of reduced pollution. Do firms release more toxins by cutting back on pollution abatement costs to boost earnings in years they meet earnings benchmarks? If so, is that relation weaker for firms with higher environmental ratings? Using Environmental Protection Agency (EPA) data on toxic emissions, we find that U.S. firms pollute more when they meet or just beat consensus earnings per share (EPS) forecasts, suggesting that meeting expectations is a more important goal than reducing pollution. We find this relation is stronger, not weaker, for firms with higher environmental ratings: they increase pollution even more when meeting earnings benchmarks than firms with lower ratings. This suggests that highly rated firms build regulatory and reputational slack over time and use it when needed to soften the negative impact of increased pollution. We contribute to the real earnings management and environmental economics literatures by documenting a negative externality of financial reporting incentives on the environment and society. We also contribute to the corporate sustainability literature by showing that an environmental, social, and governance (ESG) focus does not curb managerial short-termism.

Disclosure is of fundamental interest to accounting research. When the sign/magnitude of disclosed news is unclear, the information in disclosure events is inferred using the ratio of return volatilities during event and non-event windows (Beaver 1968). We show that return noise due to microstructure frictions and mispricing affects this ratio, and that effect is comparable to or exceeds that of information content. We use the SEC's Tick Size Pilot program to confirm the causal effect of return noise on the ratio, and to evaluate alternative ways to control for it. The most promising approach is to use the difference between, rather than the ratio of, return volatilities during event and non-event windows. We illustrate its benefits by showing how it alters prior inferences regarding time-series and cross-sectional variation in information content as well as changes in the information content of earnings announcements around the 2004 amendments to Form 8-K filings.