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Industry Risk Moderates the Relation between Environmental and Financial Performance

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Author Info
Semenova, Natalia () (Åbo Akademi University)
Hassel, Lars () (Åbo Akademi University and Umeå School of Business)
Abstract

This study extends previous research on the relation between different measures of environmental and financial performance by introducing moderating effects of inherent environmental industry risk. We provide empirical evidence from the MSCI World Index U.S. companies by using the GES Investment Services® risk rating for the period 2003-2006. The inherent environmental industry risk has a significant moderating effect on the form of the relation between environmental preparedness/performance and operating performance of the companies. In high risk or polluting industries, environmental management is costly and reduces the operating performance of companies. In low risk sectors, such as banking and insurance, leading companies on environmental management are also more profitable. The paper makes a distinction between the reputational benefits of environmental preparedness and the operational gains of environmental performance when studying the effects on market value. A significant direct effect of environmental preparedness on the market value of the companies is present, while the relation between environmental performance and market value is stronger in low risk industries than in high risk industries. In low risk industries, the market value of the companies is also on average higher and more attuned to benefits to environmental performance than in high risk industries.

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Publisher Info
Paper provided by Sustainable Investment Research Platform in its series Sustainable Investment and Corporate Governance Working Papers with number 2008/2.

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Length: 28 pages
Date of creation: 16 Sep 2008
Date of revision:
Handle: RePEc:hhb:sicgwp:2008_002

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Postal: Economics of Corporate Sustainability Management, Department of Industrial Economics and Management, Royal Institute of Technology, SE-100 44 Stockholm, SWEDEN
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Related research
Keywords: Environmental risk and opportunity; financial performance; return on assets; Tobin’s Q; panel data analysis;

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  4. Karpoff, Jonathan M & Lott, John R, Jr & Wehrly, Eric W, 2005. "The Reputational Penalties for Environmental Violations: Empirical Evidence," Journal of Law & Economics, University of Chicago Press, vol. 48(2), pages 653-75, October.
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  6. Herremans, Irene M. & Akathaporn, Parporn & McInnes, Morris, 1993. "An investigation of corporate social responsibility reputation and economic performance," Accounting, Organizations and Society, Elsevier, vol. 18(7-8), pages 587-604. [Downloadable!] (restricted)
  7. Shameek Konar & Mark A. Cohen, 2001. "Does The Market Value Environmental Performance?," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 281-289, May. [Downloadable!] (restricted)
  8. Hamilton James T., 1995. "Pollution as News: Media and Stock Market Reactions to the Toxics Release Inventory Data," Journal of Environmental Economics and Management, Elsevier, vol. 28(1), pages 98-113, January. [Downloadable!] (restricted)
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