Do polluters outperform non-polluters?

Abstract

ABSTRACT This paper investigates whether industrial companies with more toxic emissions outperform those with less toxic emissions. First, firms that pollute the most do not consistently outperform those that pollute the least in an almost stochastic dominance sense. Moreover, firms with average amounts of emissions occasionally outperform firms that pollute the least due to the non-uniform pattern in mean returns across emission portfolios. Second, although a hedge portfolio that is long (short) in the most (least) brown firms earns significantly positive alphas based on standard asset pricing models, these abnormal returns can become statistically insignificant when factors from multiple models are combined. Third, although the highest-emission quintile generates superior reward-to-risk ratios and manipulation-proof performance measures than the lowest-emission quintile, the pattern across portfolios is once again not uniform.