Measuring the Effect of Sustainability on Tobin’s Q
26 Pages Posted: 17 Jun 2020
Date Written: April 27, 2020
Do sustainable practices affect the value of the firm, as measured by Tobin’s Q ratio, and if so, would its effect be detectable on firm value? We propose a model where a renewable resource is viewed as an input as part of the firm’s production function. It is found that a measure of sustainable resource use must also reflect pricing power of the firm, tax rates and the cost of capital. I then provide evidence from simulations and small sample estimation that simple corrections to sustainability measures suggested by the model improve the statistical power of testing for the effects of sustainability on firm value. The estimated effects of sustainable resource use for a sample of 39 electricity utilities finds that even an improper correction of a sustainability measure can yield substantial improvements.
Keywords: Sustainability, Tobin’s Q, Value of the firm
JEL Classification: G12
Suggested Citation: Suggested Citation