Abstract
This paper examines the effect of sustainability performance of European corporations on their stock performance, measured as the average monthly stock return from 1996 to 2001. The econometric analysis is based on common empirical asset pricing models, particularly on the multifactor model according to Fama and French (1993, Journal of Financial Economics, 33:3–56). The consideration of sustainability performance is two-fold: The average sustainability performance of the industry in which a corporation operates and the relative sustainability performance of a corporation within a given industry. The main result is that the average environmental performance of the industry has a significantly positive influence on the stock performance. In contrast, the average social performance of the industry has a significantly negative influence. The variables of the relative environmental or social performance of a corporation within a given industry have no significant effect on the stock performance. As a by-product, the econometric analysis implies that some results of Fama and French (1993, 1996, The Journal of Finance, LI (1):55–84) regarding the risk factors of the multifactor model need not hold true for different observation periods, for different stock markets, and for the use of single stocks (instead of portfolios).
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Berkowitz MK, Qiu J (2001) Common risk factors in explaining canadian equity returns, Discussion Paper, University of Toronto
Blacconiere WG, Northcut WD (1997) Environmental information and market reactions to environmental legislation. J Account Audit Finance 12(2):149–178
Butz C, Plattner A (1999) Nachhaltige Aktienanlagen: Eine Analyse der Rendite in Abhängigkeit von Umwelt- and Sozialkriterien, Sarasin Studie, Basel
Cohen MA, Fenn SA, Konar S (1997) Environmental and financial performance: are they related? Discussion Paper, Vanderbilt University
Davis JL, Fama EF, French KR (2000) Characteristics, covariances, and average returns: 1929 to 1997. J Finance LV(1):389–406
Fama EF, French KR (1992) The cross-section of expected stock returns. J Finance XLVII(2):427–465
Fama EF, French KR (1993) Common risk factors in the returns on stocks and bonds. J Financ Econ 33:3–56
Fama EF, French KR (1996) Multifactor explanations of asset pricing anomalies. J Finance LI(1):55–84
Global Reporting Initiative (2000) Sustainability reporting guidelines on economic, environmental, and social performance, Boston
Hamilton JT (1995) Pollution as news: media and stock market reactions to the toxics release inventory data. J Environ Econ Manage 28:98–113
Hart SL, Ahuja G (1996) Does it pay to be green? An empirical examination of the relationship between emission reduction and firm performance. Bus Strategy Environ 5:30–37
Khanna M, Rose W, Quimio H, Bojilova D (1998) Toxics release information: a policy tool for environmental protection. J Environ Econ Manage 36:243–266
King A, Lenox M (2001) Does it really pay to be green? J Ind Ecol 5(1):105–116
Klassen RD, McLaughlin CP (1996) The impact of environmental management on firm performance. Manage Sci 42(8):1199–1214
Konar S, Cohen MA (1997) Information as regulation: The effect of community right to know laws on toxic emissions. J Environ Econ Manage 32:109–124
Konar S, Cohen MA (2001) Does the market value environmental performance. Rev Econ Stat 83(2):281–289
Kreander N, Gray RH, Power DM, Sinclair CD (2000) Evaluating the performance of ethical and non-ethical funds: a matched pair analysis, Discussion Paper, University of Dundee
Lintner J (1965) The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. Rev Econ Stat 47:13–37
Muoghalu MI, Robison HD, Glascock JL (1990) Hazardous waste lawsuits, stockholder returns, and deterrence. South Econ J 7(2):357–370
Schröder M (2004) The performance of Socially responsible investments: Investment funds and indices. Financial Markets and Postfolio Management 18(2):122–142
Sharpe WF (1964) Capital asset prices: a theory of market equilibrium under conditions of risk. J Finance XIX:425–442
Statman M (2000) Socially responsible mutual funds. Financ Analysts J 56(3):30–39
Thomas A (2001) Corporate environmental policy and abnormal stock price returns: an empirical investigation. Bus Strategy Environ 10:125–134
White H (1982) Maximum likelihood estimation of misspecified models. Econometrica 50(1):1–25
White MA (1995) The performance of environmental mutual funds in the United States and Germany: is there economic hope for green investors?. Res Corp Soc Perform Policy Suppl. 1: 323–344
Yamashita M, Sen S, Roberts MC (1999) The rewards for environmental conscientousness in the U.S. capital markets. J Financ Strateg Decis 12(1):73–82
Author information
Authors and Affiliations
Corresponding author
Additional information
We would like to thank José Manuel Chamorro, Shreekant Gupta, Shulamit Kahn, and other participants of the 12th Annual Conference 2003 of the European Association of Environmental and Resource Economists (EAERE) in Bilbao, Spain, and of the 18th Annual Congress 2003 of the European Economic Association (EEA) in Stockholm, Sweden, for stimulating discussions and annotations during the early stages of the research, Jan-Hendrik Hirsch, Ilja Karabanow, and Thomas Rohrmann for their sedulous work in data preparation, as well as Wolfram Schlenker and two anonymous referees for their helpful comments
An erratum to this article can be found at http://dx.doi.org/10.1007/s10640-007-9160-1
Rights and permissions
About this article
Cite this article
Ziegler, A., Schröder, M. & Rennings, K. The effect of environmental and social performance on the stock performance of european corporations. Environ Resource Econ 37, 661–680 (2007). https://doi.org/10.1007/s10640-007-9082-y
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10640-007-9082-y