Capitalizing on Sustainability: Value of Going Green

Abstract

We investigate how corporate environmental responsibility (CER) actions affect firm value. We adopt an event studies approach using two narrowly-decided 5-to-4 Supreme Court rulings and show that firms gain value when they are expected to increase their CER activities. The market reactions are larger for firms that are affected to a greater extent by the Court decisions. These return patterns are more pronounced among firms in regions with high levels of social trust. Firms that reduced toxic chemical emissions show positive earnings surprises, higher revenue and profitability, and greater capital inflow from institutional investors with longer horizons. In sum, we present empirical evidence consistent with the market viewing CER as leading to higher firm value.