Is pollution profitable? A cross-sectional study

INTRODUCTION The Go green initiatives seen at every level of society demonstrate society's concerns regarding the importance of preserving the environment. Attempts to protect the environment are seen at most, if not all, levels of society. Across borders, countries have worked on international environmental protection treaties such as the Kyoto protocol under which signatory nations committed to binding emission reduction targets (The Kyoto Protocol to the United Nations [UN] Framework Convention on Climate Change is an international treaty adopted on December 11, 1997 in Kyoto, Japan that places binding obligations on industrialized countries to reduce greenhouse gas emissions--of the member nations of the UN all but Andorra, Canada, South Sudan and the United States ratified the treaty). Within countries, governments and regulatory agencies have established rules and regulations to protect and preserve the surrounding environment, but the authority and effectiveness of these agencies varies from one country to another. In the United States, for instance, the Environmental Protection Agency [EPA] sets protective rules and applies clean-up sanctions on firms polluting the environment. In the corporate world, firms strive not just to avoid sanctions from the EPA, but also to maintain an environmentally conscious public image. Further, individuals are, in their daily actives, more aware and oriented towards recycling products and reducing waste. Wasteful activities endanger the environment whether by individuals or by businesses. Firms' large-scale operations constitute a greater threat to the environment especially when financial incentives and social incentives are at odds. In this study we shed light on the issue by providing evidence on the nature of the association between environmental and financial performance. In the environmental performance literature there has been a vigorous debate about the association between corporate environmental performance and financial performance. One school supports the traditional perspective, which suggests that expenditures on environmental improvements involve additional costs that generally provide no additional value to the firm. Another school supports the relatively newer perspective, which suggests that expenditures on environmental improvements and pollution controls lead to increased firm value. A third school suggests that corporate environmental performance and financial performance have no association whatsoever. We seek to offer some resolution to the debate, and to provide specific guidance for public policy, by employing a variety of distinct attributes of corporate environmental performance in our models. This research addresses the overall association between firms' environmental performance and capital market valuations. Prior research has provided conflicting evidence on this association, and has often followed an event study methodology that yields results that are not generalizable (See, for example, Blaconniere and Patten 1994, Blaconniere and North cut 1997, Freedman and Patten 2004, and Griffin and Sun 2013). Unlike prior studies, we conduct an explanatory study to investigate the general association between corporate environmental performance and firms' annual returns independent of any particular environmental event. By taking this approach, we are able to present evidence regarding the nature of the association between environmental and financial performance that is generalizable and that explains the contradictory results of prior studies. We are also able to investigate how environmental attributes interact when combined into a single overall measure. The results of this study may provide guidance to investors, regulators and standard setters with respect to their understanding of the nature of the conflicts involved. It may also help regulators and standard setters identify relevant venues to resolve these conflicts. If, for example, profits are the objective firms seek when conducting operations that endanger the environment, then regulators and standard setters should impose financial sanctions to make such activities unprofitable. …

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