The Effect of Environmental and Social Performance on the Stock Performance of European Corporations
This paper examines the effect of sustainability performance of European corporations on their stock performance, measured as the average monthly stock return from 1996 to 2001. The econometric analysis is based on common empirical asset pricing models, particularly on the multifactor model according to Fama and French (1993, Journal of Financial Economics, 33:3–56). The consideration of sustainability performance is two-fold: The average sustainability performance of the industry in which a corporation operates and the relative sustainability performance of a corporation within a given industry. The main result is that the average environmental performance of the industry has a significantly positive influence on the stock performance. In contrast, the average social performance of the industry has a significantly negative influence. The variables of the relative environmental or social performance of a corporation within a given industry have no significant effect on the stock performance. As a by-product, the econometric analysis implies that some results of Fama and French (1993, 1996, The Journal of Finance, LI (1):55–84) regarding the risk factors of the multifactor model need not hold true for different observation periods, for different stock markets, and for the use of single stocks (instead of portfolios). Copyright Springer Science+Business Media, Inc. 2007
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Volume (Year): 40 (2008)
Issue (Month): 4 (August)
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- Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
- Michael Berkowitz, 2001. "Common Risk Factors in Explaining Canadian Equity Returns," Working Papers berk-00-01, University of Toronto, Department of Economics.
- Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
- 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.
- White, Halbert, 1982. "Maximum Likelihood Estimation of Misspecified Models," Econometrica, Econometric Society, vol. 50(1), pages 1-25, January.
- Khanna, Madhu & Quimio, Wilma Rose H. & Bojilova, Dora, 1998. "Toxics Release Information: A Policy Tool for Environmental Protection," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 243-266, November.
- 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.
- Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
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