Do Stock Markets Penalise Environment-Unfriendly Behaviour? Evidence from India
Centre for Development Economics Working Paper No. 116
28 Pages Posted: 15 May 2003
Date Written: March 2003
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, automobile and chlor alkali firms in India on their stock prices. We find that the market generally penalizes environmentally unfriendly 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.
Keywords: green rating, capital market, environmental management, event study
JEL Classification: Q25, G14, L73
Suggested Citation: Suggested Citation