An Examination of Financial Performance and Risk of Environmentally Friendly 'Green' Companies

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ABSTRACT

Research on environmental matters is interdisciplinary, involving business, history, sociology, and science. Taking care of the environment has long been an important issue, going back to ancient times. As part of corporate social responsibility, companies are expected to safeguard the physical environment. To be identified as "green" or "environmentally friendly" is important to all types of business. This study sought to answer two research questions. Regarding the first research question as to the impact of being green on financial performance, a high green ranking was found not to be significantly related to firm financial performance. At the same time, this means that being green does not negatively impact firm profitability. Regarding the second research question as to the relationship of being green to business risk, analysis of three risk measures provides mixed results, with two of the three measures showing no relation between green score and risk. These results indicate that, at best, being green is associated with lower risk, and at worse, being green does not negatively impact firm risk.

Key words: environmentally friendly, green, financial performance

INTRODUCTION

Corporate social responsibility includes a myriad of factors, which could be categorized into two broad categories of responsibility: responsibility to people and to places. People include the traditional stakeholders such as stockholders, employees, lenders, creditors, customers, suppliers, government agencies, and people living in communities where the company operates. Places include the physical locations where the company operates. A company has a responsibility to care for the physical environment. Being identified as "green" or "environmentally friendly" is important to all types of business, whether they are retail firms, manufacturers, or service firms.

There was time, not so long ago, in which people knew little and had small concern for environmental issues. In recent decades, the concept of environmental friendliness has become a notable concern to consumers and businesses. If a corporation attains an environmentally friendly 'green' image, an important question is whether the efforts to be recognized as environmentally friendly have a positive or negative affect on financial performance?

Prior research suggests that some consumers will seek to do business with 'green' companies (Laroche et al, 2001; Smith, 2010; Wolverton & Dimitri, 2010; Oliver, 2007), but whether this additional business offsets the costs of extra efforts to go green is not clear. In addition, by going green, a company might reduce risks (e.g. regulatory fines and litigation) associated with less-than-environmentally friendly activities. Considering the above, the purpose of this study is to answer two research questions: (1) how do green companies perform financially, and (2) what is the risk level of green companies?

The paper proceeds as follows. The next section summarizes prior literature and develops our hypotheses. Next, we describe our sample selection, present our empirical methods, and discuss our results. The final section concludes.

PRIOR RESEARCH AND DEVELOPMENT OF HYPOTHESES

Research on environmental matters crosses disciplines, including business, history, sociology, and science. Within business, there have been studies within all business subfields, such as accounting, economics, finance, and marketing. Taking care of the environment has been a concern since ancient times. Recommendations for preservation of the natural environment can be found in ancient writings, such as the Bible and Koran. Approximately 1400 B.C., the Prophet Moses specified how the ancient Israelites were to manage land and care for animals. About 650 A.D., the Prophet Mohammed gave directions regarding water conservation (Smith, 2010).

In more recent times, the term 'ecology' was coined by German biologist Ernst Haeckel in 1866. …