The impact of corporate pollution on market valuation: some empirical evidence

Abstract This paper investigates the relation between the market valuation of publicly-listed corporations and their social performance, as measured by their pollution record relative to environmental regulations. Expectations are that corporations with a good (bad) environmental record should be valued at a premium (discount) by the stock market. Such a relation results from the emergence of “ethical” (or Green) investing and from an increased awareness by investors of the potential negative consequences from corporate environmental damages. Two significant innovations are introduced in this study. First, using governmental data, a pollution index is computed for each sample firm. Second, the relevance of social information for investors' purposes is directly assessed by looking at the relation between the pollution index and a firm's market valuation, within the accounting identity framework (Modigliani and Miller, 1958). Results suggest that a firm's pollution performance is interpreted by market participants as providing information about its environmental liabilities. Furthermore, results weakly support the existence of a premium (discount) in the stock market valuation of firms that meet (do not meet) environmental regulations, thus lending some credence to the existence of a demand by some stock market participants for “ethical” (or Green) investments. This suggests that the disclosure of audited social information of a non-financial nature in a firm's annual report could be beneficial to market participants.

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