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: Study shows more than half of peer-reviewed research articles published during 2007-2012 are now open access

add to favorites email to friend print save as pdf

Related Stories

Cloning whistle-blower: little change in S. Korea

35 minutes ago

The whistle-blower who exposed breakthrough cloning research as a devastating fake says South Korea is still dominated by the values that allowed science fraudster Hwang Woo-suk to become an almost untouchable ...

Glass maker deals to exit Apple, Arizona plant

41 minutes ago

Nearly 2,000 furnaces installed in a factory to make synthetic sapphire glass for Apple Inc. will be removed and sold under a deal between the tech giant and the company that had been gearing up to produce huge amounts of ...

China launches first mission to moon and back

1 hour ago

China launched its first space mission to the moon and back early Friday, authorities said, the latest step forward for Beijing's ambitious programme to one day land a Chinese citizen on the Earth's only ...

Recommended for you

Color and texture matter most when it comes to tomatoes

Oct 21, 2014

A new study in the Journal of Food Science, published by the Institute of Food Technologists (IFT), evaluated consumers' choice in fresh tomato selection and revealed which characteristics make the red fruit most appealing.

How the lotus got its own administration

Oct 21, 2014

Actually the lotus is a very ordinary plant. Nevertheless, during the Qing dynasty (1644-1911) a complex bureaucratic structure was built up around this plant. The lotus was part of the Imperial Household, ...

What labels on textiles can tell us about society

Oct 21, 2014

Throughout Chinese history, dynastic states used labels on textiles to spread information on the maker, the commissioner, the owner or the date and site of production. Silks produced in state-owned manufacture ...

User comments : 0