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 the future increase or decrease in firm value due to corporate strategies that cause better or worse firm environmental performance. We report strong evidence that low-polluter companies have substantial abnormal positive returns in the subsequent years after the environmental information was publicized while in the same period of time, high-polluter companies have no abnormal returns (positive or negative). On the contrary, we find exactly the opposite results when we analyze stock market behavior the exact same day the environmental information was publicly released. This is, for this exact publication date high polluter companies have significant negative abnormal returns while lowpolluter companies have abnormal returns that are not statistically different than zero. Overall, our results are consistent with a world in which investors have been slow to properly evaluate future increases in firm value associated with current good firm environmental performance while on the other hand investors have correctly discounted the future negative financial effects corresponding to high-polluter companies.