Toxics Release Information: A Policy Tool for Environmental Protection

Abstract

This study examines the effectiveness of public disclosure of environmental performance information as a long-run policy tool for the regulation of toxic pollution by firms. Since 1987 the US EPA requires all manufacturing firms to report their toxics releases annually. This information is compiled into a database, the Toxics Releases Inventory (TRI), and made available to the public. It is expected that well functioning markets will signal public reaction to this information directly to firms through changes in demand for their products and stocks and prompt firms to control pollution. Information based strategies are an innovative effort at enlisting market forces in the quest for efficient pollution control while reducing the role of big government bureaucracy. But it is important to examine how effective such strategies are. This study addresses two main issues. First, it examines the impact of repeated public provision of TRI data on the stock market returns of firms. Second, it develops an econometrically estimable model of a firm's choice of pollution levels to analyze the feedback effect of the change in stock market returns, following release of the TRI, on subsequent levels of pollution. These issues are addressed in the context of the U.S. chemical industry for the period 1989-94. The chemical industry is the largest contributor to toxic releases generated by manufacturing industries. Previous studies based on cross-sectional data show that companies incurred significantly negative stock market returns on the day of the disclosure of the TRI, for the first time in 1989. These studies, however, also show that the largest 'penalties', in the form of the largest declines in stock prices, were not targeted towards the largest emitters but towards firms that were not 'known' to be polluters on the basis of prior environmental information available to investors. This suggests that the greater the prior environmental information that investors have about a firm, the smaller the impact of the provision of additional information on their stock market returns. In other words, it indicates diminishing effects on investors of providing additional information about known polluters. Using the event study methodology, this paper demonstrates that sample firms incur negative stock market returns during the one-day period following the disclosure of the TRI. These returns were not statistically significant in 1989, the first year of the release of the TRI, because these firms were already known to be polluters. However, repeated provision of the TRI information caused investors to focus on the changes in the level of toxic pollution generated. This causes the negative stock market returns of even known polluter firms, such as those in the chemical industry, to become statistically significant from the second year onwards (1990-94). Econometric analysis shows that these losses in market values led firms to modify their pattern of pollution generation and management. Market reaction had a significantly negative impact on their subsequent on-site toxic releases but a significantly positive impact on wastes transferred off-site for recycling and transfer. However, the net effect of these losses on the aggregate volume of toxic wastes generated by these firms is insignificant.

JEL Classification: Q2, Q28