Philipp Krueger, Swiss Finance Institute - University of Geneva
Pedro Matos, University of Virginia
Abstract: Using a novel measure of a firm's green revenues, this paper sizes up the green economy. We shed light on the factors driving global public companies' expansion of business activities in support of the green transition towards a low-carbon and more environmentally sustainable economy. Our analysis shows that the green economy grew at an accelerated pace after the Paris Agreement. Both regulatory initiatives and innovative US firms converting green patents into actual revenues from green products and services have led to this accelerated growth. We also document that a stronger presence of institutional investors prior to the Paris Agreement is associated with higher green revenues afterwards. Finally, we examine the stock returns of firms with high green revenues and find only modest evidence of a green alpha which seems to be concentrated in US stocks in the post-Paris period.
Discussant: Andreas Hoepner, University College Dublin
Abstract: In this paper, we apply a novel text-based classification procedure to identifying green trademarks in the USPTO trademark dataset and study the development of environment-friendly products and services in the US economy over the past forty years. Given the “use in commerce” requirement for US trademarks, these trademarks capture newly commercialized green products/services and thus firms’ commitment to environmental protection and sustainability. We first show that firms with more green products receive higher environmental ratings, hold more green patents, and have higher revenue growth and market value. We then explore whether and how firms’ green product introduction is influenced by the environmental scandals in their industry, and find that firms launch significantly more new green products after product market peers receive negative media coverage of their environmental issues. We also present suggestive evidence for the two driving forces underlying this pattern: product market competition and stakeholder pressure. We conclude that environmental scandals trigger stakeholders’ green demands and that firms catering to those demands do well by doing good.
Discussant: Umit Gurun, University of Texas-Dallas
Abstract: This paper investigates the stock market’s reaction to changes in the interaction between local environmental regulations and a firm’s polluting behavior. Our identification strategy uses county-level ozone noncompliance designations induced by discrete policy changes in the National Ambient Air Quality Standards (NAAQS) as a source of exogenous variation in local regulatory stringency. Given the exogenous revision in the NAAQS threshold, many counties suddenly found themselves in nonattainment relative to the year prior, even if their ozone emissions did not change by all that much. Therefore, the switch to nonattainment is triggered by the lowering of the NAAQS threshold that defines noncompliance, rather than by rising ozone emissions. On average, the market responds positively to firms exposed to noncompliance designations compared to non-exposed firms. In the cross-section, firms’ value initially increases with noncompliance exposure but declines at higher levels. Examining the mechanisms reveals that this nonlinear variation arises from the offsetting effects of noncompliance exposure on incumbent firms, encompassing a trade-off between the benefits of competitive advantages and the costs of regulatory compliance. Furthermore, short-term market reactions to noncompliance designations are consistent with their long-term effects on firms’ accounting performance. Overall, the evidence suggests that the stock market internalizes the perceived benefits and costs of local environmental regulation, thereby influencing stock market valuations.
Abstract: Biodiversity loss as a global concern requires dramatic shifts in conservation efforts that carry substantial costs. We offer an initial investigation into how the financial market prices such conservation costs, exploiting the “Green Shield Action” (GSA) --- a regulatory change aimed at preserving biodiversity in national nature reserves in China --- as an exogenous shock to local public financing. We document that GSA, while improving biodiversity, augments the yields of municipal corporate bonds by around 25 basis points. The effects are more pronounced for bonds with shorter maturities and for local governments in weak fiscal positions. The increased cost of public capital can be largely attributed to transition pressure resulting from pre-existing economic activities within reserves and the growth in local public spending on biodiversity following the reform. Investors show little consideration towards
endeavors counteracting biodiversity loss beyond financial payoffs. Our findings also provide insights concerning investor education and policy interventions for addressing the financing gap for biodiversity conservation.
Discussant: Laura Starks, University of Texas-Austin
