The Market Valuation of Environmental Capital Expenditures by Pulp and Paper Companies

Posted: 20 Oct 2003

See all articles by Peter Clarkson

Peter Clarkson

University of Queensland - Business School; Simon Fraser University (SFU) - Beedie School of Business; Financial Research Network (FIRN)

Yue Li

University of Toronto - Joseph Rotman School of Management

Gordon D. Richardson

University of Toronto - Rotman School of Management

Abstract

The objective of this study is to examine the market valuation of environmental capital expenditure investment related to pollution abatement in the pulp and paper industry. The total environmental capital expenditure of $8.7 billion by our sample firms during 1989-2000 supports the focus on this industry. In order to be capitalized, an asset should be associated with future economic benefits. The existing environmental literature suggests that investors condition their evaluation of the future economic benefits arising from environmental capital expenditure on an assessment of the firms' environmental performance. This literature predicts the emergence of two environmental stereotypes: low polluting firms that overcomply with existing environmental regulations, and high polluting firms that just meet minimal environmental requirements. Our valuation evidence indicates that there are incremental economic benefits associated with environmental capital expenditure investment by low polluting firms but not high polluting firms. We also find that investors use environmental performance information to assess unbooked environmental liabilities, which we interpret to represent the future abatement spending obligations of high polluting firms in the pulp and paper industry. We estimate average unbooked liabilities of $560 million for high polluting firms, or 16.6 percent of market capitalization.

Keywords: environmental capital expenditures, market valuation, environmental accounting, environmental risk management

JEL Classification: G12, G31, M41, Q20

Suggested Citation

Clarkson, Peter and Li, Yue and Richardson, Gordon D., The Market Valuation of Environmental Capital Expenditures by Pulp and Paper Companies. Available at SSRN: https://ssrn.com/abstract=454560

Peter Clarkson

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Simon Fraser University (SFU) - Beedie School of Business ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Yue Li (Contact Author)

University of Toronto - Joseph Rotman School of Management ( email )

Joseph Rotman School of Management
105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416-978-0857 (Phone)
416-971-3048 (Fax)

Gordon D. Richardson

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-8601 (Phone)
416-971-3048 (Fax)

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