Capitalizing on Sustainability: Value of Going Green

38 Pages Posted: 14 Sep 2019

See all articles by Taehyun Kim

Taehyun Kim

University of Notre Dame - Department of Finance

Yongjun Kim

University of Seoul

Date Written: August 31, 2019


This paper investigates how corporate Environmental, Social, and Governance (ESG) actions affect firm value. By employing an event study around two 5-to-4 Supreme Court rulings and using portfolio-based approaches, we document that prices capitalize sustainability in the cross-section. When the Court awards broader regulatory authority to the EPA, polluting firms with the largest discrepancies vis-a-vis the new rules heralded by the Court exhibit the largest price responses. Conversely, when the Court narrows the regulatory limit of existing environmental law, polluting firms lose value. The announcement returns are more sensitive to the Court rulings for firms in regions with a higher level of social trust. More generally, a portfolio of firms improving their sustainability by adopting cleaner production practices earns alphas (4.43% annually for value-weighted returns) compared to firms which adopt more toxic practices and thereby reduce sustainability. Firms with greener production practices show positive earnings surprises, higher revenue and profitability, and more capital inflow from institutional investors with longer horizons. The abnormal returns are more pronounced among firms in regions with a high level of trust. In sum, we show that firms gain value when they go green.

Keywords: Supreme Court, abnormal returns, impact investing, sustainability, trust

JEL Classification: G11; G14; G32; G38; M14

Suggested Citation

Kim, Taehyun and Kim, Yongjun, Capitalizing on Sustainability: Value of Going Green (August 31, 2019). Available at SSRN: or

Taehyun Kim (Contact Author)

University of Notre Dame - Department of Finance ( email )

259 Mendoza College of Business
Notre Dame, IN Indiana 46556-0399
United States
574-631-1492 (Phone)

Yongjun Kim

University of Seoul ( email )

Korea, Republic of (South Korea)

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