Corporate Environmental Policy and Shareholder Value: Following the Smart Money

Abstract

We examine the value consequences of corporate social responsibility through the lens of institutional shareholders. We find a sharp asymmetry between corporate policies that mitigate the firm’s exposure to environmental risk and those that enhance its perceived environmental friendliness (“greenness”). Institutional investors shun stocks with high environmental risk exposure, which we show have lower valuations as predicted by risk management theory. These findings suggest that corporate environmental policies that mitigate environmental risk exposure create shareholder value. In contrast, firms that increase greenness do not create shareholder value and are also shunned by institutional investors.

Keywords: Environmental risk management, corporate social responsibility, socially responsible investing, institutional ownership, analyst coverage, firm value

JEL Classification: D71, G11, G12, G32, Q50