Sunday, November 6, 2011

Voluntary corporate environmental initiatives and shareholder wealth
Abstract: Researchers debate whether environmental investments reduce firm value or actually improve financial performance. We provide some compelling evidence on shareholder wealth effects of membership in voluntary environmental programs (VEPs). Companies announcing membership in EPA's Climate Leaders, a program targeting reductions in greenhouse gas emissions, experience significantly negative abnormal stock returns. The price decline is larger in firms with poor corporate governance structures, and for high market-to-book (i.e., high growth) firms. However, firms joining Ceres, a program involving more general environmental commitments, have insignificant announcement returns, as do portfolios of industry rivals. Overall, corporate commitments to reduce greenhouse gas emissions appear to conflict with firm value maximization. This has important implications for policies that rely on voluntary initiatives to address climate change. Further, we find that firms facing climate-related shareholder resolutions or firms with weak corporate governance standards – giving managers the discretion to make such voluntary environmentally responsible investment decisions – are more likely to join Climate Leaders; decisions that may result in lower firm value.

... According to a version of the paper available free of charge at

The average market value of equity six trading days prior to the announcement is $30 billion (median $10 billion) and total sales (from Compustat) average $22 billion (median $11 billion) in the year prior to the announcement. Moreover, 92% (94%) of the sample firms have a market value (total sales) exceeding the median rival firm in its industry. The average book-to-market ratio is 0.38 (median 0.36). The sample firms have slightly higher growth options than their industry rivals, with only one third of the firms having a book-to-market above the industry median. Only 12% of the sample firms are traded on NASDAQ (versus the NYSE or Amex), another manifestation of the large size of firms joining Ceres and Climate Leaders Companies joining Climate Leaders and setting greenhouse gas goals are substantially larger than the firms in Ceres: the average market value of the CL firms is $33 billion (median $11 billion) compared to $11 billion (median $2 billion) for the Ceres firms. Moreover, almost all companies in Climate Leaders (98%) have a market value exceeding their median industry rival, while two-thirds of the Ceres firms are larger than the industry median. The Ceres firms further have a higher average book-to-market ratio than the firms in the CL and GHG groups. The proportion of firms listed on NASDAQ, however, is similar across the three subsamples.
The average cumulative abnormal returns for the sample firms and where 0 is the announcement day. We include two days prior to the announcement to capture any effects of information leakage as well as the following two days to include effects of announcements made after market closing and a gradual update of the stock price. Interestingly, the average abnormal announcement return across the full sample is -0.68% and highly significant for the window -1 to +1. The stock price decline is greatest for firms stating a specific goal for the reduction of greenhouse gases (ACAR-1,1 = -1.30%) and firms becoming a partner of the Climate Leaders program (ACAR-1,1 = -0.89%). Indeed, the total market capitalization drops by $16 billion over the three-day window across the 46 firm announcing that they join Climate Leaders. The stock price decline is even greater over the -2 to +2 window, with a mean ACAR-2,2 of -1.2% across the full sample, and -1.5% and -1.6% for the firms in CL and GHG, respectively.12 These results are confirmed by the generally low proportion of positive to negative returns: 14 positive versus 32 negative ACAR-2,2 for Climate Leaders and 3 versus 18 for the GHG goal. Thus, there is convincing evidence that shareholder value declines when firms announce their membership in Climate Leaders and again when a greenhouse goal is announced.
The announcement return for firms endorsing the Ceres Principles is indistinguishable from zero.
by Karen Fisher-Vanden 1 and Karin S. Thorburn 2
1. Department of Agricultural Economics and Rural Sociology, Pennsylvania State University, 112-E Armsby Building, University Park, PA 16870, USA; Fax: +1 814 865 3746.
2. Norwegian School of Economics and Business Administration (NHH), Norway
Journal of Environmental Economics and Management via Elsevier Science Direct
Volume 62, Issue 3; November, 2011; Pages 430-445
Keywords: Corporate social responsibility; Environmentally responsible investing; Climate change; Greenhouse gas emissions; Capital expenditures; Shareholder wealth

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