Green firms rewarded by financial markets

May 29, 2008

When a company improves its environmental performance, it is common to think that the accompanying economic improvements are based on the company's more efficient use of resources. However,

A new study in Strategic Management Journal reveals that financial markets reward green firms because those firms are seen as less risky.

Using data on 267 U.S. firms, Mark Sharfman and Chitru S. Fernando of the University of Oklahoma analyzed whether firms that had improved their environmental risk management also experienced a reduction in their total cost of capital, and found evidence supporting their hypothesis.

Financial markets seem to perceive greener firms as safer investments because of a reduced likelihood of litigation, government penalties, and/or catastrophic accidents. The financial markets reward this lower level of risk by charging the firm less for its capital, thus allowing the firm to carry more debt.

In addition, firms benefit when individual investors seek out green firms, and the study shows that greener firms had higher levels of ownership by individual investors. The broader the ownership of a firm's stock, the lower its cost of equity capital.

Greener performance thus has the potential shorter-term and longer-term financial benefits. As the authors note, "firms that make major investments in environmental performance may be providing the markets with an earlier signal about their longer term financial and stock performance."

Source: Wiley

Explore further: Interactivity tools can boost persuasiveness of websites

Related Stories

China orders media giant Sina to 'improve censorship'

8 hours ago

China's government has threatened to shut down Sina, one of the country's most popular news websites unless it "improves censorship", state media reported, in a rare public glimpse into controls over the ...

Turkmenistan pledges to curb water use

Apr 05, 2015

The leader of Turkmenistan on Sunday pledged to streamline water use, a huge problem in the isolated desert nation believed to be among the world's top water wasters.

Recommended for you

Music: Will climate change give us the blues?

Apr 14, 2015

Climate change is predicted to intrude into almost every area of life—from where we live, to what we eat and whom we war with. Now music can be added to the list.

User comments : 0

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.