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Do Stock Markets Penalise Environment-Unfriendly Behaviour? Evidence from India

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  • Shreekant Gupta

    (Delhi School of Economics)

Abstract

A growing body of research points to the fact that capital markets react to environmental news and thus create incentives for pollution control in both developed and emerging market economies. In this paper we conduct an event study to examine the impact of environmental rating of large pulp and paper, auto and chlor alkali firms on their stock prices. We find that the market generally penalizes environmentally un-friendly behaviour in that announcement of weak environmental performance by firms leads to negative abnormal returns of up to 43 percent. A positive correlation is found between abnormal returns to a firm's stock and the level of its environmental performance. These findings should be viewed as further evidence of the important role that capital markets could play in environmental management, particularly in developing countries where environmental monitoring and enforcement are weak.

Suggested Citation

  • Shreekant Gupta, 2003. "Do Stock Markets Penalise Environment-Unfriendly Behaviour? Evidence from India," Working papers 116, Centre for Development Economics, Delhi School of Economics.
  • Handle: RePEc:cde:cdewps:116
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    References listed on IDEAS

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    1. Afsah, Shakeb & Laplante, Benoit & Wheeler, David, 1996. "Controlling industrial pollution : a new paradigm," Policy Research Working Paper Series 1672, The World Bank.
    2. Boardman, Anthony & Vertinsky, Ilan & Whistler, Diana, 1997. "Using information diffusion models to estimate the impacts of regulatory events on publicly traded firms," Journal of Public Economics, Elsevier, vol. 63(2), pages 283-300, January.
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    Cited by:

    1. Karpoff, Jonathan M & Lott, John R, Jr & Wehrly, Eric W, 2005. "The Reputational Penalties for Environmental Violations: Empirical Evidence," Journal of Law and Economics, University of Chicago Press, vol. 48(2), pages 653-675, October.
    2. Jennifer Boutant & Marie-Anne Verdier, 2013. "Les Strategies De Communication Sur La Performance : Le Cas Des Societes Francaises En Difficulte," Post-Print hal-00991974, HAL.
    3. Sunderasan Srinivasan & Raj Singh, 2010. "The persistence of green goodwill," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 12(5), pages 825-837, October.
    4. Shachi Rai & Sangeeta Bansal, 2015. "Factors Explaining Corporate Social Responsibility Expenditure in India," Review of Market Integration, India Development Foundation, vol. 7(1), pages 37-61, April.
    5. Frédérique Dejean & Isabelle Martinez, 2008. "Communication environnementale et coût des fonds propres : Le cas des entreprises du SBF120," Post-Print halshs-00525815, HAL.

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    More about this item

    Keywords

    green rating; capital market; environmental management; event study;
    All these keywords.

    JEL classification:

    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • L73 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Forest Products

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