Environmental Risk Management and the Cost of Capital

Strategic Management Journal, Forthcoming

53 Pages Posted: 12 May 2008

See all articles by Mark Sharfman

Mark Sharfman

University of Oklahoma - Michael F. Price College of Business

Chitru S. Fernando

University of Oklahoma - Michael F. Price College of Business

Abstract

Our study of 267 U.S. firms shows that improved environmental risk management is associated with a lower cost of capital. Our findings provide an alternative perspective on the environmental - economic performance relationship, which has been dominated by the view that improvements in economic performance stem from better resource utilization. Firms also benefit from improved environmental risk management through a reduction in their cost of equity capital, a shift from equity to debt financing, and higher tax benefits associated with the ability to add debt. These findings help build better theory regarding the outcomes of strategic improvements in environmental risk management.

Keywords: environmental risk management, cost of capital, environmental performance, environmental strategy

JEL Classification: G31, G32, G39, M14, Q29

Suggested Citation

Sharfman, Mark P. and Fernando, Chitru S., Environmental Risk Management and the Cost of Capital. Strategic Management Journal, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1129032

Mark P. Sharfman (Contact Author)

University of Oklahoma - Michael F. Price College of Business ( email )

Norman, OK
United States

HOME PAGE: http://faculty-staff.ou.edu/S/Mark.P.Sharfman-1/

Chitru S. Fernando

University of Oklahoma - Michael F. Price College of Business ( email )

Adams Hall
307 West Brooks Street
Norman, OK 73019-4004
United States
405-325-2906 (Phone)
405-325-7688 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/F/Chitru.Fernando-1/

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