Investor’s Perception of Value Creation in Environmental Strategies: The Impact of Past Environmental Performance on Future Stock Market Returns

In this paper we test whether investors incorporate into stock market prices thefuture increase or decrease in firm value due to corporate strategies that causebetter or worse firm environmental performance. We report strong evidence thatlow-polluter companies have substantial abnormal positive returns in thesubsequent years after the environmental information was publicized while inthe same period of time, high-polluter companies have no abnormal returns(positive or negative). On the contrary, we find exactly the opposite resultswhen we analyze stock market behavior the exact same day the environmentalinformation was publicly released. This is, for this exact publication date highpolluter companies have significant negative abnormal returns while lowpollutercompanies have abnormal returns that are not statistically different thanzero. Overall, our results are consistent with a world in which investors havebeen slow to properly evaluate future increases in firm value associated withcurrent good firm environmental performance while on the other hand investorshave correctly discounted the future negative financial effects corresponding tohigh-polluter companies.