The brown side of firm flexibility

Abstract

Using a sample of 24,321 firm‐year observations from 25 countries over the 2006–2021 period, we show that operating flexibility increases carbon emissions. This increase is due to to the efficiency and instability channels. The relation is stronger for firms where expansion flexibility outweighs contraction flexibility, and for focused and financially unconstrained firms. Cross‐country analyses indicate that the effect of flexibility on carbon emissions is more prominent in developed economies with superior institutional quality. In contrast to prior studies that highlight the beneficial consequences of operating flexibility, our findings expose its adverse effect on environmental performance.