An Analysis of the Wealth Effects of Green Marketing Strategies

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Abstract

Event study methodology is used to examine the wealth effects, or stock price reactions, to corporate announcements of green marketing activities. Two procedures for measuring stock price reactions and two different tests of significance are used in the study. The results for the sample of 73 firms show that the market value for the average firm in the sample declines by 3.14% during the period from 10 days prior to 10 days after the news is announced. Announcements related to green products, recycling efforts, and appointments of environmental policy managers result in insignificant stock price reactions. However, announcements for green promotional efforts produce significantly negative stock price reactions. Sampling by financial and operational characteristics shows that firms with higher growth in earnings, larger firms, and firms with higher advertising-to-sales ratios experience relatively less negative stock price reactions. Managerial implications of the results and directions for future research are also presented.

Section snippets

Research Issues

Environmental issues had previously been primarily viewed by managers as constraints or operating problems and, thus, managers' approaches in dealing with them had usually been reactive (Azzone and Bertele, 1994). More recently, pro-active changes in management attitudes toward the issues have been taking place with individual firms (Ottman, 1993). Only the strong commitment of senior management, through pro-active changes, can cause the firm's stakeholders to realize that the firm has

Measurement of Excess Returns

Event study methodology, as introduced by Fama et al. (1969) and further developed by Brown and Warner (1985), has been used by a number of researchers in marketing to examine the market valuation effects associated with marketing strategies (see, for example, Mathur and Mathur, 1995), who studied the effects of advertising slogan changes, and Chaney, Devinney, and Winer (1991), who studied the effects of new product introduction).

Normal returns in the market are assumed to be modeled by the

Conclusion

The overall results of this study indicate that, in general, corporate news regarding green marketing activities is not well received by investors. The average firm in the sample loses a statistically significant 3.14% of its market value in the 20 days surrounding the announcement date.

Four subsamples of announcements, classified by major marketing strategies, showed slightly different results. For three subsamples, those related to announcements of green products, recycling efforts, and

Managerial Implications

The results of this study indicate that, in general, investors have reservations about corporate green marketing activities. However, investors seem to feel more comfortable with green marketing activities by firms that have relatively better financial performance, as measured by growth in earnings per share, by firm size, and by the advertising-to-sales ratio. Firms with relatively better financial performance may enjoy credibility with investors. Thus, their green marketing activities may be

Limitations and Future Research

This is, to our knowledge, the first study to examine the wealth effects of green marketing activities. As such, many research issues that would enrich our understanding of the interplay between corporate marketing strategies and their impact on stock prices are not covered in the present analysis. For example, research by Chaney, Devinney, and Winer (1991) indicates a positive stock price reaction to new product announcements. Similarly, Mathur and Mathur (1996) observe a positive stock price

Acknowledgements

The authors thank three anonymous referees and JBR Special Issue Editors James Verbrugge and George M. Zinkhan for their helpful comments on earlier drafts of this article, and Patty Doolin for her assistance with the preparation of the manuscript. This research was supported by a College of Business Scholars Program Research Grant to Lynette Knowles Mathur.

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