The Economic Impact of Capital Expenditures: Environmental Regulatory Delay as a Source of Strategic Advantage?

35 Pages Posted: 25 Nov 2010 Last revised: 17 Feb 2011

See all articles by Carolyn G. Wirth

Carolyn G. Wirth

Massey University - School of Economics and Finance

Jing Chi

Massey University - School of Economics and Finance

Martin R. Young

Massey University - School of Economics and Finance

Date Written: November 24, 2010

Abstract

This study investigates the impact of environmental regulatory delay on capital market reactions to capital expenditure announcements. Using the time to gain resource consent (regulatory) approval as an indicator of expected resource consent compliance costs, positive valuation effects are found from project announcements when the expected time to gain resource consent approval is long. The findings suggest that by undertaking voluntary capital expenditures with high environmental compliance costs, listed companies can create strategic advantages. For example, long consent times may improve firms’ opportunities to develop specialised capabilities such as early mover advantages, reputational benefits, or enhanced environmental management systems. Alternatively, high environmental compliance costs may inhibit actions by industry competitors and new entrants, resulting in greater expected project NPVs.

Keywords: Capital investments, market valuation, environmental regulation, compliance

JEL Classification: G31, Q58

Suggested Citation

Wirth, Carolyn G. and Chi, Jing and Young, Martin R., The Economic Impact of Capital Expenditures: Environmental Regulatory Delay as a Source of Strategic Advantage? (November 24, 2010). Finance and Corporate Governance Conference 2011 Paper. Available at SSRN: https://ssrn.com/abstract=1714636 or http://dx.doi.org/10.2139/ssrn.1714636

Carolyn G. Wirth (Contact Author)

Massey University - School of Economics and Finance ( email )

Private Bag 11-222
Palmerston North, 4442
New Zealand

Jing Chi

Massey University - School of Economics and Finance ( email )

Private Bag 11-222
Palmerston North,, 4442
New Zealand
+64 6 3569099 Ext. 84048 (Phone)
+64 6 350 5651 (Fax)

Martin R. Young

Massey University - School of Economics and Finance ( email )

Private Bag 11222
Palmerston North, 4442
New Zealand

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