The value relevance of environmental performance: evidence from Indonesia

Abstract

PurposeThis paper aims to extend previous developed market-based research on the value relevance of environmental performance by testing the relationship between share prices of Indonesian-listed corporations and their environmental performance ratings.Design/methodology/approachThe sample consists of 60 listed firms which are rated by the Indonesia Ministry of Environment between 2002 and 2012, resulting in a sample of 246 observations. The Ohlson (1995) model was utilized and modified by including environmental ratings.FindingsThe research finds that superior environmental performance is associated with higher share price, whereas inferior environmental performance is value irrelevant to the market.Research limitations/implicationsConsidering the significance of PROPER, this research did not observe other types of corporate environmental performance, such as those released by the press and reported in the company annual reports and websites. These limitations are not controlled for in the tests, and this might confound inferences.Originality/valueThe paper addresses a gap in the literature by providing insight on how a developing capital market values both superior and inferior environmental performance. It also provides implication on the effectiveness of environmental monitoring policy in providing incentives for firms to improve their environmental performance