Hernan Ortiz Molina

Environmental and social (E&S) issues have attracted increasing attention from academics and practitioners. This thesis is a collection of two essays that examine firms’ efforts in these issues and the relevant value implications.The first essay documents a labor channel of firms’ exposure to climate change and studies how firms respond to climate-induced rising labor costs. I focus on firms’ use of outdoor workers and document two channels through which climate change contributes to rising labor costs: physical risk - lower labor supply and productivity in high temperatures; regulatory risk - governments introducing regulations to protect workers against heat hazards. I find that firms exposed to climate change through the labor channel have higher capital-labor ratios, especially when managers believe in climate change or when jobs are easy to automate. After experiencing shocks to physical (abnormally high temperatures) and regulatory (the adoption of the Heat Illness Prevention Standard (HIPS) in California) risks, high-exposure firms switch to more capital-intensive production functions. These firms also respond by innovating more, especially in technologies facilitating automation and reducing labor costs. Furthermore, labor exposure to climate change impedes job creation and hurts workers’ earnings. Overall, the findings highlight that climate change accelerates automation in occupations exposed to rising temperatures.The second essay provides evidence supporting the cash flow channel through which firms’ E&S investments increase value. Using Safegraph’s daily foot-traffic data at the store level, we find a significant decrease in a firm’s store visits following the firm’s violation of E&S standards. The decrease in visits by more E&S-conscious households is nearly four times greater than that by less E&S-conscious households. The reduction in store visits is associated with a reduction in firm sales. On average, one additional E&S incident is associated with a loss of $19.2 million in more E&S-conscious areas and a loss of $9.6 million in less E&S-conscious areas. The findings imply that good E&S performance can enhance firm value by attracting consumers and increasing sales.

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This thesis presents a collection of essays on the intersection of finance, labour, and political economy. In Chapter 2, I exploit the 2003 reduction in the legislative cap for the H-1B visa program to show that a firm’s ability to hire skilled workers affects corporate investment. U.S. firms use the H-1B program to recruit foreign skilled (college-educated) workers, and I find that the reduction in the cap caused a significant decrease in investment for firms that were more reliant on H-1B workers as a source of skilled labour. The effect persists for several years, and is more pronounced for firms hiring workers in “industrial” occupations compared with firms hiring workers in “knowledge” occupations. The remaining essays examine how political incentives affect the policies of U.S. public-sector defined benefit pension plans. In Chapter 3, I present novel empirical evidence that “pension deficits”—the difference between liability accrual rates and asset accumulation rates—are systematically higher in gubernatorial election years. This electoral cycle pattern is explained by systematic dips in governmental contributions, and plans that exhibit larger electoral cycles tend to experience deteriorating funding levels and lower economic growth. Falsification tests, including analysis of private-sector DB pension plans and unexpected Governor transitions, indicate that non-political factors are unlikely to explain the documented electoral cycles. In Chapter 4, I present a theoretical model detailing how electoral incentives induce incumbent politicians to borrow from public pension plans in a short-sighted manner at the expense of taxpayers. Using a career concerns model framework, I show this conflict is rooted in (1) moral hazard stemming from protections that insulate employees from the costs of unfunded pension liabilities, and (2) information asymmetry stemming from the opacity of public pension plans. The model generates predictions consistent with empirical findings from Chapter 3. Specifically, electoral cycles in pension deficits are more pronounced for states that place the burden of funding unfunded pension liabilities on taxpayers, and for states with less transparent public pension systems. Furthermore, pension deficits are larger during elections that are more closely contested and during gubernatorial terms in which the incumbent remains eligible to run for re-election.

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