Voluntary Abatement and Market Value: An Event Study Approach

When public benefits of environmentally friendly practices are well understood, there is anecdotal evidence that suggests that firms that follow such practices also receive private benefits. The paper investigates the effect of voluntary pollution prevention activity in creating private value for the firm. Our sample consists of 635 publicly traded companies for which we have pollution related financial data. Using event study methodology, we examine the announcement effects accompanying the Toxics Release Inventory report for the firms in our sample. We incorporate an expectations model and then examine how firms perform when they depart from expectations. Our analysis provides some evidence that firms that fail to undertake environmental improvements see a decline in their market value. However, firms that exceed their expected level of activity experience insignificant market impacts.