Environmental and Resource Economics

, Volume 29, Issue 2, pp 137–157 | Cite as

The Relationship between the Environmental and Financial Performance of Public Utilities

  • Greg Filbeck
  • Raymond F. Gorman


A growing body of research has centered on theissue of the relationship between financial andenvironmental performance. The lack ofconsensus in this literature can be attributedto several factors. The cost of complying withenvironmental regulation can be significant anddetrimental to shareholder wealth maximization.Conversely, a firm that can effectively controlpollution might also be able to effectivelycontrol other costs of production and henceearn a higher rate of return. We utilize datafrom the Investor Responsibility ResearchCenter as well as a proprietary database toinvestigate the relationship betweenenvironmental performance and financialperformance in electric utilities. Utilities,as producers and distributors of energy,produce substantial amounts of pollution.However, since public utilities are regulated,studying the financial and environmentalperformance of utilities affords us theopportunity to see what role regulation playsin enhancing or diminishing the relationshipbetween financial and environmentalperformance.Our results differ from earlier studies in thatwe find do not find a positive relationshipbetween holding period returns and anindustry-adjusted measure of environmentalperformance nor do we find that regulatoryclimate appears to explain returns. While theredoes not appear to be a clearly definedrelationship between regulatory climate and acompliance based measure of environmentalperformance, there is evidence of a negativerelationship between financial return and amore pro-active measure of environmentalperformance. We offer several possibleinterpretations of these results and extensionsfor future research.

environment performance public utilities regulation 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Archer, S. (1981), 'The Regulatory Effects on Cost of Capital in Electric Utilities', Public Utilities Fortnightly 107(18), 36–39.Google Scholar
  2. Barth, M. and M. McNichols (1994), 'Estimation and Market Valuation of Environmental Liabilities Relating to Superfund Sites', Journal of Accounting Research 32(Supplement), 177–209.Google Scholar
  3. Blacconiere W. and W. D. Northcut (1997), 'Environmental Information and Market Reactions to Environmental Legislation', Journal of Accounting, Auditing, and Finance 12(2), 149–178.Google Scholar
  4. Blum, G., J. Blumberg and A. Korsvold (1996), 'Environmental Performance and Shareholder Value', World Business Council for Sustainable Development.Google Scholar
  5. Campbell K., S. Sefcik and N. Soderstrom (1998), 'Site Uncertainty, Allocation Uncertainty, and Superfund Liability Valuation', Journal of Accounting and Public Policy 17(4/5), 331–366.Google Scholar
  6. Chen K. H. and R. W. Metcalf (1980), 'The Relationship between Pollution Control Records and Financial Indicators Revisited and Further Comment', Accounting Review 55(1), 168–185.Google Scholar
  7. Cochran P. and R. Wood (1984), 'Corporate Social Responsibility and Financial Performance', Academy of Management Journal 27(1), 42–56.Google Scholar
  8. Cohen, M. A., S. A. Fenn and S. Konar (1995), 'Environmental and Financial Performance: Are They Related?' Investor Responsibility Research Center.Google Scholar
  9. Cormier D., M. Magnum and B. Morard (1993), 'The Impact of Corporate Pollution on Market Valuation: Some Empirical Evidence', Ecological Economics 8, 135–155.Google Scholar
  10. Dubin, J. and P. Navarro (1982), 'Regulatory Climate and the Cost of Capital', in M. A. Crew, ed., Regulatory Reform and Public Utilities. Lexington, Massachusetts: Lexington Books.Google Scholar
  11. Erfle S. and M. Fratantuono (1992), 'Interrelations Among Corporate Social Performance, Social Disclosure, and Financial Performance: An Empirical Investigation', Working paper, Dickinson College.Google Scholar
  12. Fama, E. F. and K. R. French (1992), 'The Cross-Section of Expected Stock Returns', Journal of Finance 47(2), 427–465.Google Scholar
  13. Filbeck, G., R. Gorman and G. Vora (1997), 'Stock Price Reaction to Equity Issues of Public Utilities: The Influence of Regulatory Climate', Managerial and Decision Economics 18(7/8), 731–745.Google Scholar
  14. Gorman, R. and G. Vora (1993), 'An Examination of Regulatory Regime and Public Utility Underwriting Costs from an Agency Perspective', Journal of Business Research 28(3), 211–224.Google Scholar
  15. Hamilton, J. T. (1995), 'Pollution as News: Media and Stock Market Reactions to the Toxics Release Inventory Data', Journal of Environmental Economics and Management 28, 98–113.Google Scholar
  16. Hart, S. and A. Gautum (1996), "Does It Pay to be Green? An Empirical Examination of the Relationship Between Emission Reduction and Firm Performance', Business Strategy and the Environment 5, 30–37.Google Scholar
  17. Hays, W. L. and R. L. Winkler (1975), Statistics: Probability, Inference, and Decision, 2nd ed. New York: Holt, Rinehart and Winston.Google Scholar
  18. Investor Responsibility Research Center, Corporate Environmental Profiles Directory (1992) (Wash-ington, DC: IRRC).Google Scholar
  19. Klassen, R. D. and C. P. McLaughlin (1996), 'The Impact of Environmental Management on Firm Performance', Management Science 42, 1199–1213.Google Scholar
  20. Karpoff, J. M. and J. R. Lott Jr. (1993), 'The Reputational Penalty Firms Bear from Committing Criminal Fraud', Journal of Law and Economics 36(2), 757–802.Google Scholar
  21. King, A. and M. Lenox (2002), 'Exploring the Locus of Profitable Pollution Reduction', Manage-ment Science 48(2), 289–299.Google Scholar
  22. Konar, S. and M. Cohen (1997), 'Information As Regulation: The Effect of Community Right to Know Laws on Toxic Emissions', Journal of Environmental Economics and Management 32(1), 109–124.Google Scholar
  23. Konar, S. and M. Cohen (2001), 'Does the Market Value Environmental Performance?' The Review of Economics and Statistics 83(2), 281–289.Google Scholar
  24. Mahapatra, S. (1984), 'Investor Reaction to Corporate Social Accounting', Journal of Business Finance and Accounting 11(1), 29–40.Google Scholar
  25. Maxwell, J. W., T. P. Lyon and S. C. Hackett (2000), 'Self-Regulation and Social Welfare: The Political Economy of Corporate Environmentalism', Journal of Law and Economics 43(2), 583–717.Google Scholar
  26. McInerney, F. and S. White (1997), The Total Quality Corporation. New York: Truman Talley Books/Plume.Google Scholar
  27. McGuire, J., A. Sundgren and T. Schneeweis (1988), 'Corporate Social Responsibility and Firm Financial Performance', Academy of Management Journal 31(4), 854-872.Google Scholar
  28. Navarro, P. (1983), 'How Wall Street Ranks the Public Utility Commissions', Financial Analysts Journal 39(6), 46–49.Google Scholar
  29. Palmer, K., W. E. Oates and P. R. Portney (1995), 'Tightening Environmental Standards: The Benefit-Cost or the No-Cost Paradigm', Journal of Economic Perspectives 9(4), 119–132.Google Scholar
  30. Phillips Jr., C. (1988), The Regulation of Public Utilities: Theory and Practice. Arlington, Virginia: Public Utilities Reports.Google Scholar
  31. Porter, M. E. and C. van der Linde (1995), 'Toward a New Conception of the Environmental-Competitiveness Relationship', Journal of Economic Perspectives 9(4), 97–118.Google Scholar
  32. Rao, R. and R. Moyer, 1994, 'Regulatory Climate and Electric Utility Capital Structure Decisions', Financial Review 29(1), 97–124.Google Scholar
  33. Reed, D. (1998), Green Shareholder Value: Hype or Hit? Washington, DC: World Resources Institute.Google Scholar
  34. Segerson, K. and T. Tietenberg (1992), 'The Structure of Penalties in Environmental Enforcement: An Economic Analysis', Journal of Environmental Economics and Management 23(2), 179–200.Google Scholar
  35. Sharpe, W. (1966), 'Mutual Fund Performance', Journal of Business 39(1), 119–138.Google Scholar
  36. Sharpe, W. (1994), 'The Sharpe Ratio', The Journal of Portfolio Management 21(1), 49–58.Google Scholar
  37. Smart, B. (1992), Beyond Compliance, A New Industry View of the Environment. Washington, DC: World Resources Institute.Google Scholar
  38. Spicer B. H. (1978), 'Investors, Corporate Social Performance and Informational Disclosure: An Empirical Study', Accounting Review 53, 94–111.Google Scholar
  39. Stinson C. and S. Schaltegger (1993), Environmental Accounting, working paper, University of Texas at Austin.Google Scholar
  40. Treynor, J. (1966), 'How to Rate Management Investment Funds', Harvard Business Review 43, 63–75.Google Scholar
  41. US Environmental Protection Agency (1990), 'Environmental Investments: The Cost of a Clean Environment, Report Summary of the Administrator of the EPA to the Congress of the United States', EPA-230-12-90-084, December.Google Scholar
  42. Vance S. (1975), 'Are Socially Responsible Corporations Good Investment Risks', Management Review 64, 18–24.Google Scholar
  43. White M. A. (1991), 'Green Investing: The Recent Performance of Environmentally-Oriented Mutual Funds', McIntire School of Commerce, University of Virginia, July.Google Scholar

Copyright information

© Kluwer Academic Publishers 2004

Authors and Affiliations

  • Greg Filbeck
  • Raymond F. Gorman

There are no affiliations available

Personalised recommendations