Impact of Environmental Investments on Corporate Financial Performance: Decomposing Valuation and Cash Flow Effects

Journal of Real Estate Finance and Economics

38 Pages Posted: 18 Nov 2021

See all articles by Avis Devine

Avis Devine

York University - Schulich School of Business

Erkan Yönder

John Molson School of Business, Concordia University

Date Written: October 22, 2021

Abstract

Environmentally-sustainable investment can impact firm financial performance through multiple channels. We concentrate on disentangling the related cash flow and valuation impacts. By using an instrumental variable approach, we find that U.S. REITs with a more environmentally-sustainable portfolio attract premiums to their market valuation beyond operating benefits, carry lower systematic risk, and are subject to less uninformed trading (for office and retail portfolios). Such firms also experience both higher asset-level rental revenues and net operating income, and lower interest costs. Importantly, the equity market premium exceeds the property market premium, which is partially explained by reputational effects. Results also confirm valuation findings in office and retail portfolios.

Keywords: Environmental performance, corporate performance, valuation, cash flows, real estate, retail

JEL Classification: G31, G32, O30, R33

Suggested Citation

Devine, Avis and Yönder, Erkan, Impact of Environmental Investments on Corporate Financial Performance: Decomposing Valuation and Cash Flow Effects (October 22, 2021). Journal of Real Estate Finance and Economics, Available at SSRN: https://ssrn.com/abstract=3947873 or http://dx.doi.org/10.2139/ssrn.3947873

Avis Devine (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

HOME PAGE: http://schulich.yorku.ca/faculty/avis-devine/

Erkan Yönder

John Molson School of Business, Concordia University ( email )

Montreal
Canada

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