Impact of Environmental Performance on Firm Value for Sustainable Investment: Evidence from Large US Firms

Abstract

This research examines the impact of environmental performance on firm value, applying the event study methodology to Newsweek's Green Rankings' announcement of 2012 for large US firms. Specifically, it analyzes the impact of the absolute green score and green rank of firms on their performance in the stock market. We found that investors perceive the announcement as positive news, leading to significant positive standardized cumulative abnormal returns (SCARs). After controlling for industry- and firm-specific effects, we observed that firms with repeated green rankings for enhancing environmental performance showed significantly higher SCARs than those with either reduced or unchanged environmental performance. In addition, the environmental impact score measuring environmental damage from a firm's operational activities was found to be the most influential factor in improving the firm's value. Our findings are beneficial to managers in allocating resources to different types of environmental initiative, and provide valuable insight for sustainable environmental investment. Copyright (c) 2014 John Wiley Sons, Ltd and ERP Environment