Financial outcomes of environmental risk and opportunity for US companies

Abstract

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.

An Examination of Accounting and Auditing Issues Related to Strategic Environmental Initiatives

“…Given that firms with greater environmental initiatives tend to report stronger financial results (Bragdon and Marlin 1972;Spicer 1978;Douglas and Judge 1995;Guenster et al 2006;Semenova and Hassel 2008), and also given that managers in general have been shown to manipulate earnings via discretionary accruals in order to appear stronger financially (Burgstahler and Dichev 1997;Payne and Robb 2000;Dechow et al 2000;Matsumoto 2002;Das and Zhang 2003;Abarbanell and Lehavy 2003;Lin et al 2008), my finding of lower earnings management for environmentallyresponsible firms supports the notion that the strong financial performance documented for such firms is not a result of earnings management, to the extent the evidence suggests in this study. My results imply the relatively better financial performance of environmentally responsible firms reported in the prior literature is likely due to real economic gains as such firms seem to have developed better relationships with stakeholders, consumers and society, which in turn, creates loyalty and generates revenues (e.g., Fry et al 1982;Hillman and Keim 2001;Lev et al 2010).…”

“…Tobin's q (Guenster et al 2006;Semenova and Hassel, 2008). Collectively, the studies reviewed support a positive link between environmental initiatives and financial performance, which underscores a potential motivation for firms to increase capital investments in order to participate in such initiatives.…”

“…Extant literature shows superior financial performance for firms with strong environmental performance (Bragdon and Marlin 1972;Spicer 1978;Douglas and Judge 1995;Guenster et al 2006;Semenova and Hassel 2008). However, several studies also find that firms reporting superior financial performance tend to engage in greater levels of earnings management, potentially overstating the level of actual economic gains attained (Burgstahler and Dichev 1997;Payne and Robb 2000;Dechow et al 2000;Matsumoto 2002; Das and Zhang 2003;Abarbanell and Lehavy 2003;Lin et al 2008).…”

“…In the more recent empirical archival studies, the environmental preparedness and performance of firms are significant and positively associated with accounting-based operational and financial performance measures such as return on assets and Tobin's q (Guenster et al 2006;Semenova and Hassel 2008). As detailed comprehensive data on environmental performance or initiatives is not readily available from public sources, Douglas and Judge (1995) utilize a survey questionnaire method.…”

“…In the more recent empirical archival studies, firm environmental preparedness and performance are significant and positively associated with accounting-based operational and financial performance measures, such as return on assets and Tobin's q (Guenster et al 2006;Semenova and Hassel 2008). Additionally, Douglas and Judge (1995) utilize a survey questionnaire administered to U.S. managers, due to lack of publicly available environmental initiative data, and find that firms with greater natural environment resources commitments exhibit superior environmental and financial performance.…”