This paper provides insight into how environmental information is reflected in the market value of listed Swedish companies. Using the residual income valuation model, we express market value of equity as a function of book value of equity, accounting earnings, and environmental performance, where the last variable is used as a proxy for other value-relevant information. Our research is motivated by the recommendation of the Swedish Society of Financial Analysts regarding environmental reporting. This recommendation assumes that environmental information has value relevance, since it is likely to affect the expected future earnings of listed companies. We contribute empirical findings to current debate on the relationship between environmental performance and shareholder value. The cost-concerned school argues that environmental investments represent only increased costs, resulting in decreased earnings and lower market values. The value creation school regards environmental efforts as a way to increase competitive advantage and improve financial returns to the investors. The current research finds support for the cost-concerned school, because the results indicate that environmental performance has a negative influence on the market value of firms.

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We investigate whether mandatory energy performance certificates of existing residential properties contribute to property price premiums after the implementation of the EU directive on the energy performance of buildings in the Swedish private housing market. Analysing mandatory energy performance certificates of the 2009-2010 private housing transactions, we find that energy performance is associated with transaction price in situations when it is conditional on a reference benchmark. We also document property price premiums for energy performance within housing segments built before 1960 and those with a lower transaction price per square metre. Our results suggest that the property market values energy performance, and we make recommendations on which housing segments need policy support to encourage energy improvements.

The study extends previous research on the relation between environmental and financial performance in two ways. First, we recognize that inherent environmental risk differs among industries. Increased levels of industry risk cause companies to have lower market values even if they are more profitable than companies in low risk industries. Second, we decompose the multi-dimensional environmental opportunity construct into dimensions of preparedness and performance. As an extension of previous research on the economic value of environmental performance, we show that the reputational benefits of environmental preparedness mainly increase market value, while environmental performance also can bring operational benefits to financial performance. In high risk or polluting industries, environmental management is costly and reduces the operating performance of companies. Copyright © 2008 John Wiley & Sons, Ltd and ERP Environment.