The Impact of Environmental Information Disclosures on Shareholder Returns in a Company: An Empirical Study

Article excerpt

The Emergency Planning and Community Right to Know Act (1986) has mandated Toxic Release Inventory (TRI) disclosures in the United States. This Act requires all manufacturing companies (SIC code 20-39) who employ more than 10 people to provide an annual report about the release of more than 300 specified toxic chemicals. Similar legislation exists in other countries as well. How is this information used by investors and corporations? We develop and test a regression model to answer this question. We also perform a few robustness tests. Our sample comes from TRI disclosures for "top 100 " corporate polluters based on COMPUSTAT data. Descriptive statistics and correlation measures are also provided. The higher the return on assets the higher is Tobin's q (a proxy for firm value or shareholder wealth). The waste disposal variable (toxic air release) is a statistically significant predictor of Tobin's q. As expected, the sign of the regression coefficient for waste disposal is negative. In addition, firm size has a significant impact on Tobin's q. A firm's beta, P/E ratio, and the corporate governance variable are all statistically insignificant.

1. Introduction

The disastrous Union Carbide accident that occurred in India in 1984 and other smaller chemical accidents have caused anxiety in the public's mind about the release of chemicals from factories. The Emergency Planning and Community Right to Know Act (1986) has mandated Toxic Release Inventory TRI disclosures. This Act requires all manufacturing companies (SIC code 20-39) in the United States who employ more than 10 people to provide an annual report about release of more than 300 specified toxic chemicals. The TRI program offers environmental performance information to the public and is administered by the Environmental Protection Agency (EPA). How is this information used by investors and corporations?

EPA's Environmental Economics Research Strategy (EPA, 2004) identifies measuring the benefits of environmental information disclosures as one of its high priority research areas. Some interesting research results have already been published. For example, Konar and Cohen (1997) report negative stock price reactions to TRI disclosures in 1989. These negative stock returns forced companies to change tiieir behavior. Those firms with the largest negative stock market returns to TRI announcements in 1989 subsequently reduced their emissions more than other firms in their industry. The purpose this research project is to examine the association between the TRI disclosures and firm value as measured by Tobin's q. The goal of examining the association between the TRI thsclosures and firm value will be accomplished through the development and testing of a regression model. A few robustness tests are also conducted. Tobin's q is a widely used proxy for firm value in the finance literature (Gompers, Ishii and Metrick, 2003) and is used in this study as the dependent variable.

Several researchers have conducted event stuthes and documented negative stock price reactions to TRI announcements (Hamilton 1995 and Khanna et al. 1998). Event stuthes examine the stock price reactions on one or two days when the environmental information is thsclosed. Klassen and McLaughlin (1996) also reported significant negative stock price reactions to bad environmental news such as oil spills. These event stuthes do not analyze longer-term stock price trends. These stuthes have generally used smaller samples. Moreover, they have used data from 1989 which are eighteen years old. To overcome these thfficulties, a new regression model is developed which uses more recent data from 2000 TRI thsclosures. The TRI thsclosure data is compiled from raw data reported to the EPA on a facility-by-facility basis and not on a company-bycompany basis. The thfficulty of aggregating to company-level data makes the 2000 TRI thsclosures the most recent data currently available.

2. Prior Research

Karpoff and Lott (1993) report that when corporate illegal activities and other fraudulent financial schemes are revealed, stock price declines have been the result. …