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: Thomas Edison's 'lost' idea: A device to hear the dead

add to favorites email to friend print save as pdf

Related Stories

Evolving robot brains

9 hours ago

Researchers are using the principles of Darwinian evolution to develop robot brains that can navigate mazes, identify and catch falling objects, and work as a group to determine in which order they should ...

Facebook fends off telecom firms' complaints

9 hours ago

Facebook founder Mark Zuckerberg fended off complaints on Monday that the hugely popular social network was getting a free ride out of telecom operators who host its service on smartphones.

Scientists find clues to cancer drug failure

9 hours ago

Cancer patients fear the possibility that one day their cells might start rendering many different chemotherapy regimens ineffective. This phenomenon, called multidrug resistance, leads to tumors that defy ...

Glass coating improves battery performance

10 hours ago

Lithium-sulfur batteries have been a hot topic in battery research because of their ability to produce up to 10 times more energy than conventional batteries, which means they hold great promise for applications ...

Recommended for you

Thomas Edison's 'lost' idea: A device to hear the dead

16 hours ago

One of Thomas Edison's little-known ambitions was to build a device to hear the voices of the dead, according to a nearly lost chapter of the inventor's memoirs which is being republished in France this week.

Bribery 'hits 1.6 billion people a year'

Feb 27, 2015

A total of 1.6 billion people worldwide – nearly a quarter of the global population – are forced to pay bribes to gain access to everyday public services, according to a new book by academics at the Universities of Birmingham ...

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.