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Market Reactions to Corporate Environmental Performance Related Events: A Meta-analytic Consolidation of the Empirical Evidence

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Abstract

Research on the relationship between corporate environmental performance (CEP) and corporate financial performance (CFP) has consistently grown and is gaining widespread attention. Given the vast body of CEP–CFP studies, recently scholars have begun to take stock of the cumulative results. However, no study so far has meta-analyzed the findings yielded by event studies assessing the stock market reactions to corporate environmental performance-related events (CEP-related events). This paper sets out to close this gap by synthesizing previous empirical results regarding the stock market impact of positive and negative CEP-related events. Results indicate a positive relationship across studies in terms of positive market reactions to positive events and negative reactions to negative events. Furthermore, the findings show that the market reactions are stronger for negative events than for positive events (i.e., asymmetry in the stock market reaction). Finally, this study examines whether methodological artifacts (i.e., differences in the study designs) may explain the differences in the findings of the analyzed event studies.

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Notes

  1. In addition, there are several meta-analyses regarding the relationship between corporate social performance (CSP) and CFP (e.g., Allouche and Laroche 2005; Orlitzky et al. 2003). As CEP can be considered a dimension or a component of the broader construct of CSP (e.g., Busch and Hoffmann 2011; Orlitzky et al. 2003), the CSP–CFP meta-analyses partly captured the CEP–CFP link by means of subgroup analysis.

  2. It is worth mentioning that the efficient market hypothesis is not free from criticism. In particular, behavioral finance scholars have challenged the different forms of the efficient market hypothesis (e.g., Shleifer 2000).

  3. There may be several reasons for reverse causal links between CEP and CFP. For example, firms with superior CFP may be likely to possess slack resources that allow them to invest in environmental activities (e.g., Endrikat et al. 2014; Waddock and Graves 1997). Furthermore, also CEP related events themselves might be a trigger for causal links from CFP to CEP. For instance, negative stock market reaction to negative CEP-related events in time period one may initiate corporate environmental investments leading to improved CEP in time period two. (I would like to thank an anonymous reviewer for raising this point).

  4. For example, previous empirical studies have revealed moderating effects of firm size (e.g., Sharma and Henriques 2005), innovation activities (e.g., Wagner 2010), or industry characteristics (e.g., Hull and Rothenberg 2008) and mediating effects of reputation (e.g., Russo and Fouts 1997), organizational culture (e.g., Surroca et al. 2010), or firm risk (e.g., Bansal and Clelland 2004).

  5. The Calvert Social Index is a stock market index created by Calvert Investments. It consists of stocks of companies that are selected from the largest publicly traded US companies according to several social screening criteria.

  6. I conceived CEP-related events as incidents referring to environmentally friendly or environmentally harmful corporate actions or behavior. Thus, announcements of environmental regulations were not considered as events in the sense of this study.

  7. Keywords included terms such as environment, environmental, pollution, polluting, ecology, sustainability, performance, market, return, financial, economic, and stock.

  8. For the employed statistical conversions, see for example Lipsey and Wilson (2001).

  9. Meta-analytic calculations can be based on either a fixed-effects or a random-effects model (Raudenbush 1994). While a fixed-effects model assumes that the underlying population effect size is the same in all studies, a random-effects model assumes that population effect size may very across studies (Dalton and Dalton 2005; Geyskens et al. 2009). Several scholars contended that the random-effects model is more realistic and provides more accurate estimates (e.g., Cheung and Chan 2005; Geyskens et al. 2009). Thus, I followed the conventional practice and based my calculations on random-effects models.

  10. In cases of sample periods involving years before and after the year 2000, the studies were coded according to the main emphasis of the sample period.

  11. For a more detailed discussion of ARs and CARs see for example Brown and Warner (1985) or Strong (1992).

  12. For proofing that the difference was statistically significant, I conducted an additional meta-analysis including both effect sizes for positive and negative events as separate subgroups whereby the sign of the effect sizes for negative events has been reversed. The Q B indicated a significant difference (Q B  = 200.360, p < .01).

  13. For robustness reasons, the samples were also split using the years 1998, 1999, 2001, and 2002. The results were similar.

Abbreviations

AR:

Abnormal return

CAR:

Cumulative abnormal return

CEP:

Corporate environmental performance

CFP:

Corporate financial performance

CI:

Confidence interval

CSP:

Corporate social performance

CSR:

Corporate social responsibility

DJSI:

Dow Jones Sustainability Index

EMS:

Environmental management system

NRBV:

Natural resource-based view

UNGC:

Accenture and UN Global Compact

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  1. Faculty of Economics, Chair of Business Management, especially Management Accounting and Controlling, TU Dresden, Muenchner Platz 1/3, 01069, Dresden, Germany

    Jan Endrikat

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Endrikat, J. Market Reactions to Corporate Environmental Performance Related Events: A Meta-analytic Consolidation of the Empirical Evidence. J Bus Ethics 138, 535–548 (2016). https://doi.org/10.1007/s10551-015-2598-0

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