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Do Corporate Global Environmental Standards in Emerging Markets Create Or Destroy Market Value

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  • Glen Dowell
  • Stuart Hart
  • Bernard Yeung
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    Abstract

    Arguments can be made on both sides of the question of whether a stringent, global corporate environmental standard represents a competitive asset or liability for multinational enterprises (MNEs) investing in emerging and developing markets. This paper seeks to answer this question by analyzing the global environmental standards of a large sample of US-based MNEs in relation to their market performance. We find that firms adopting a single, stringent global environmental standard have higher market values, as measured by Tobin's q, than firms defaulting to less stringent, or poorly enforced host country standards. Thus, developing countries that use lax environmental regulations to attract foreign direct investment end up attracting poorer quality, and perhaps, less competitive firms. Our results also suggest that externalities are incorporated to a significant extent in firm valuation. We discuss plausible reasons for this observation.

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    File URL: http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp259.pdf
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    Bibliographic Info

    Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 259.

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    Length: pages
    Date of creation: 01 Jun 1999
    Date of revision:
    Handle: RePEc:wdi:papers:1999-259

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    Keywords: corporate environmental policy; corporate performance; race to the bottom in foreign direct investment;

    This paper has been announced in the following NEP Reports:

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    1. repec:fth:michin:282 is not listed on IDEAS
    2. Revesz, Richard L. & Stavins, Robert N., 2007. "Environmental Law," Handbook of Law and Economics, Elsevier.
    3. Eskeland, Gunnar S. & Harrison, Ann E., 1997. "Moving to greener pastures : multinationals and the pollution-haven hypothesis," Policy Research Working Paper Series 1744, The World Bank.
    4. Wayne B Gray & Ronald J Shadbegian, 1993. "Environmental Regulation And Manufacturing Productivity At The Plant Level," Working Papers 93-6, Center for Economic Studies, U.S. Census Bureau.
    5. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
    6. Daly, Herman E., 1994. "Fostering environmentally sustainable development: four parting suggestions for the World Bank," Ecological Economics, Elsevier, vol. 10(3), pages 183-187, August.
    7. Morck, Randall & Yeung, Bernard, 1991. "Why Investors Value Multinationality," The Journal of Business, University of Chicago Press, vol. 64(2), pages 165-87, April.
    8. Adam B. Jaffe et al., 1995. "Environmental Regulation and the Competitiveness of U.S. Manufacturing: What Does the Evidence Tell Us?," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 132-163, March.
    9. Robert D. Klassen & Curtis P. McLaughlin, 1996. "The Impact of Environmental Management on Firm Performance," Management Science, INFORMS, vol. 42(8), pages 1199-1214, August.
    10. Grossman, Gene M & Krueger, Alan B, 1995. "Economic Growth and the Environment," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 353-77, May.
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