The Economic Impact of Capital Expenditures: Environmental Regulatory Delay as a Source of Strategic Advantage?

Abstract

This study investigates the impact of environmental regulatory delay on capital market reactions to capital expenditure announcements. Using the time to gain resource consent (regulatory) approval as an indicator of expected resource consent compliance costs, positive valuation effects are found from project announcements when the expected time to gain resource consent approval is long. The findings suggest that by undertaking voluntary capital expenditures with high environmental compliance costs, listed companies can create strategic advantages. For example, long consent times may improve firms’ opportunities to develop specialised capabilities such as early mover advantages, reputational benefits, or enhanced environmental management systems. Alternatively, high environmental compliance costs may inhibit actions by industry competitors and new entrants, resulting in greater expected project NPVs.