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Corporate Environmental Policy and Shareholder Value: Following the Smart Money

Published online by Cambridge University Press:  02 October 2017

Chitru S. Fernando ,
Mark P. Sharfman  and
Vahap B. Uysal
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Abstract

We examine the value consequences of corporate social responsibility through the lens of institutional shareholders. We find a sharp asymmetry between corporate policies that mitigate the firm’s exposure to environmental risk and those that enhance its perceived environmental friendliness (“greenness”). Institutional investors shun stocks with high environmental risk exposure, which we show have lower valuations, as predicted by risk management theory. These findings suggest that corporate environmental policies that mitigate environmental risk exposure create shareholder value. In contrast, firms that increase greenness do not create shareholder value and are also shunned by institutional investors.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 5 , October 2017 , pp. 2023 - 2051
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

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Footnotes

1

We are grateful to an anonymous referee for suggestions that have substantially improved the paper. We thank Antonio Camara, Sudheer Chava, Bill Dare, Louis Ederington, Bilal Erturk, Janya Golubeva, Jarrad Harford (the editor), Joel Harper, Tomas Jandik, Marcin Kacperczyk, Byoung Kang, Philipp Krüger, Ali Nejadmalayeri, Mitchell Petersen, Ramesh Rao, Clifford Smith, Johan Sulaeman, Yi Zhou, Hong Zou, and seminar participants at the 2010 Financial Management Association (FMA) Annual Meeting, the 2010 FMA Europe Conference, the 2010 Southwest Finance Symposium, the 2009 Academy of Management Annual Meeting, the 2009 Southwestern Finance Association Annual Meeting, Lehigh University, Texas Christian University, Hong Kong Polytechnic University, the University of Hong Kong, and the University of Oklahoma for valuable discussions and comments. We thank Seth Hoelscher and Jingjue Yi for their excellent research assistance. We are responsible for any remaining errors.

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