“Green” Social Norms, Portfolio Allocations and Corporate Environmental Practices

Abstract

Institutional investors located in cities with social norms friendlier towards the environment (“green” cities) are sensitive to corporate environmental practices. Their portfolios are tilted away from stocks exhibiting negative environmental practices, particularly those headquartered in the same city – practically eliminating the generally observed local bias. Concurrently, firms headquartered in green cities are less likely to exhibit negative environmental practices. The production facilities they operate pose lower environmental toxicity risks. Firms violating stringent local norms regarding the environment experience lower market valuations and lower abnormal stock returns. Indeed, norms towards environmental issues permeate corporate ownership structure, environmental practices, and market valuation.