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Can Capital Markets Create Incentives for Pollution Control?

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  • Paul Lanoie

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  • Benoit Laplante
  • Maité Roy
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    Abstract

    It has been observed that upon trading-off the costs and benefits of pollution control, profit-maximizing firms may choose not to invest their resources in pollution abatement since the expected penalty imposed by regulators falls considerably short of the investment costs. Regulators have recently embarked on a deliberate strategy to release information to markets (investors and consumers) regarding firms' environmental performance in order to enhance incentives for pollution control. In this paper, we analyze the role that capital markets may play to create such incentives. Evidence drawn from American and Canadian studies indicates that capital markets react to the release of information, and that large polluters are affected more significantly from such releases than smaller polluters. This result appears to be a function of the regulator's willingness to undertake strong enforcement actions as well as the possiblity for capital markets to rank and compare firms with respect to their environmental performance. Il a été observé que, par rapport au compromis entre les coûts et les bénéfices du contrôle de la pollution, les entreprises maximisant leurs profits peuvent choisir de ne pas investir leurs ressources dans la réduction de la pollution puisque la pénalité imposée par le législateur est considérablement plus faible que les coûts de l'investissement nécessaire. Récemment, les législateurs se sont engagés dans une stratégie délibérée qui a pour objet de rendre disponibles, aux agents économiques (investisseurs et consommateurs), des informations portant sur la performance environnementale des entreprises. Dans cet article, nous analysons le rôle que le marché des capitaux joue dans la création de tels incitatifs. Les résultats obtenus d'études américaines et canadiennes indiquent que le marché des capitaux réagit à la publication d'information, et que les grands pollueurs sont plus affectés que les petits. Ces résultats semblent être fonction de la capacité pour le marché des capitaux de classer et de comparer les entreprises selon leur performance environnementale et de la crédibilité du législateur quant aux actions coercitives qu'il peut entreprendre.

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    Bibliographic Info

    Paper provided by CIRANO in its series CIRANO Working Papers with number 97s-05.

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    Date of creation: 01 Feb 1997
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    Handle: RePEc:cir:cirwor:97s-05

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    Related research

    Keywords: Environment; Financial Markets; Regulation; Environnement; marchés financiers; réglementation;

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    References

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    1. Magat, Wesley A & Viscusi, W Kip, 1990. "Effectiveness of the EPA's Regulatory Enforcement: The Case of Industrial Effluent Standards," Journal of Law and Economics, University of Chicago Press, vol. 33(2), pages 331-60, October.
    2. Mary E. Deily & Wayne B. Gray, 1989. "Enforcement of pollution regulations in a declining industry," Working Paper 8912, Federal Reserve Bank of Cleveland.
    3. Afsah, Shakeb & Laplante, Benoit & Wheeler, David, 1996. "Controlling industrial pollution : a new paradigm," Policy Research Working Paper Series 1672, The World Bank.
    4. Gregg A. Jarrell & Sam Peltzman, 1984. "The Impact of Product Recalls on the Wealth of Sellers," University of Chicago - George G. Stigler Center for Study of Economy and State 33, Chicago - Center for Study of Economy and State.
    5. Cormier, Denis & Magnan, Michel & Morard, Bernard, 1993. "The impact of corporate pollution on market valuation: some empirical evidence," Ecological Economics, Elsevier, vol. 8(2), pages 135-155, October.
    6. Borenstein, Severin & Zimmerman, Martin B, 1988. "Market Incentives for Safe Commercial Airline Operation," American Economic Review, American Economic Association, vol. 78(5), pages 913-35, December.
    7. Fama, Eugene F, et al, 1969. "The Adjustment of Stock Prices to New Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 10(1), pages 1-21, February.
    8. William F. Sinclair, 1991. "Controlling Effluent Discharges from Canadian Pulp and Paper Manufacturers," Canadian Public Policy, University of Toronto Press, vol. 17(1), pages 86-105, March.
    9. Fry, Clifford L & Lee, Insup, 1989. "OSHA Sanctions and the Value of the Firm," The Financial Review, Eastern Finance Association, vol. 24(4), pages 599-610, November.
    10. Viscusi, W Kip & Hersch, Joni, 1990. "The Market Response to Product Safety Litigation," Journal of Regulatory Economics, Springer, vol. 2(3), pages 215-30, September.
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    Cited by:
    1. Khanna, Madhu, 2001. " Non-mandatory Approaches to Environmental Protection," Journal of Economic Surveys, Wiley Blackwell, vol. 15(3), pages 291-324, July.
    2. Dasgupta, Susmita, 1999. "Opportunities for improving environmental compliance in Mexico," Policy Research Working Paper Series 2245, The World Bank.
    3. Dasgupta, Susmita & Laplante, Benoit & Mamingi, Nlandu, 1998. "Capital markets responses to environmental performance in developing countries," Policy Research Working Paper Series 1909, The World Bank.
    4. Amarnath Ananthanarayanan, 1998. "Is There A Green Link A Panel Data Value Event Study Of The Relationship Between Capital Markets And Toxic Releases," Departmental Working Papers 199818, Rutgers University, Department of Economics.
    5. Arthur Caplan, 2002. "Reputation and the Control of Pollution," Working Papers 2002-24, Utah State University, Department of Economics.
    6. Iulie Aslaksen & Terje Synnestvedt, 2003. "Corporate environmental protection under uncertainty," Discussion Papers 355, Research Department of Statistics Norway.
    7. Wheeler, David, 2001. "Racing to the bottom : foreign investment and air pollution in developing countries," Policy Research Working Paper Series 2524, The World Bank.

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