Do Polluters Outperform Non-Polluters?

Abstract

This paper investigates whether industrial companies with higher toxic emissions outperform those with lower toxic emissions. First, the highest polluters do not consistently outperform the lowest polluters in an almost stochastic dominance sense. Moreover, average polluters occasionally outperform the lowest polluters due to the non-uniform pattern in mean returns across emission portfolios. Second, although a portfolio long (short) in the highest (lowest) polluters earns significantly positive alphas based on standard asset pricing models, these abnormal returns can become statistically insignificant when factors from multiple models are combined. Third, although the highest-emission quintile generates superior reward-to-risk ratios and manipulation-proof performance measures than the lowest-emission quintile, the pattern across portfolios is once again not uniform.

Keywords: environmental risks, pollution, equity returns, portfolio performance measurement, almost stochastic dominance

JEL Classification: G10, G12, G14, G15