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Time horizons of environmental versus non‐environmental costs: evidence from US tort lawsuits

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  • Eva Regnier
  • Craig Tovey

Abstract

One explanation for a positive correlation between environmental and financial performance at the firm level is a bias in firms' investment evaluation processes caused by systematic differences between environmental and other investment opportunities. One of these systematic differences, often hypothesized but still unverified, is that environmental costs occur farther in the future than other costs. We empirically test this hypothesis, and find statistically significant support for it. In our data set the mean time lag for environmental costs was more than ten years, compared with five years for the control set costs. Such a difference could induce managers to accept too much environmental liability if they evaluate investments using discounted cash flow methods with a discount rate based on the firm‐wide cost of capital. Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment.

Suggested Citation

  • Eva Regnier & Craig Tovey, 2007. "Time horizons of environmental versus non‐environmental costs: evidence from US tort lawsuits," Business Strategy and the Environment, Wiley Blackwell, vol. 16(4), pages 249-265, May.
    • Handle: RePEc:bla:bstrat:v:16:y:2007:i:4:p:249-265
    DOI: 10.1002/bse.494
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    References listed on IDEAS

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    Cited by:

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    3. Chunguang Bai & Joseph Sarkis, 2013. "Green information technology strategic justification and evaluation," Information Systems Frontiers, Springer, vol. 15(5), pages 831-847, November.
    4. Jorge A. Romero & Martin Freedman & Neale G. O'Connor, 2018. "The impact of Environmental Protection Agency penalties on financial performance," Business Strategy and the Environment, Wiley Blackwell, vol. 27(8), pages 1733-1740, December.

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