An Empirical Investigation of Environmental Performance and the Market Value of the Firm

Abstract

This paper analyzes the shareholder value effects of environmental performance by measuring the stock market reaction associated with announcements of environmental performance. We examine the market reaction to two categories of environmental performance. The first category includes 430 announcements of Corporate Environmental Initiatives (CEIs) that provide information about self-reported corporate efforts to avoid, mitigate, or offset the environmental impacts of the firm's products, services, or processes. The second category includes 381 announcements of Environmental Awards and Certifications (EACs) that provide information about recognition granted by third parties specifically for environmental performance. Although the market does not react significantly to the aggregated CEI and EAC announcements, we find statistically significant market reactions for certain CEI and EAC subcategories. Specifically, announcements of philanthropic gifts for environmental causes are associated with significant positive market reaction, voluntary emissions reductions are associated with significant negative market reaction, and ISO 14001 certifications are associated with significant positive market reaction. The difference between the market reactions to the CEI and EAC categories is statistically insignificant. Overall, we find that the market is selective in reacting to announcements of environmental performance with certain types of announcements even valued negatively.

Keywords: market value, environmental performance, environmental initiatives, awards, certifications, stock market reaction