As discussed in chapter 2, the Water Pollution Control Act and Amend-
ments of 1972, 1977, 1981 and 1987 were aimed at abating water pollution at
the source by setting standards for different pollutants for water outflows
from plants. In order to meet these standards, the firms required a substan-
tial amount of capital expenditures for pollution abatement activities; this
was especially true for pulp and paper firms. The polluting industries in gen-
eral, and pulp and paper firms in particular, argued that these expenditures
would adversely affect their economic performance and reduce their com-
petitiveness.

In this chapter we evaluate the association between pollution and eco-
nomic performance of pulp and paper firms and empirically test whether
pollution abatement activities undertaken by these firms had a negative im-
pact on their economic performance. The empirical tests are based on pollu-
tion data generated and reported in chapter 6 of this book and on economic
data obtained from compustat tapes.

The association between pollution and economic performance of pulp
and paper firms has been examined by several researchers, as discussed in
chapter 7 of this book. Their findings have provided conflicting evidence. In
1980, Christainsen, Gollop and Haveman found that pollution regulations
that resulted in heavy expenditures for pollution abatement activities had
been one of the contributing factors to the slowdown in productivity
growth. ¹ Though these researchers did not examine directly the impact of

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