Environmental Performance And Capital Markets--Evidence From India

This paper examines whether capital markets in developing countries respond to news about environmental performance of firms thereby creating incentive for pollution control. In particular we conduct an event study of firms in three polluting industries in India (paper and pulp, cement and iron and steel) that were rated under the Green Rating Project. Along lines of earlier research we find the stock market generally penalizes weak environmental performance among firms. Interestingly, paper and pulp firms that were being rated for a second time and did strictly worse relative to their previous performance experienced significant negative returns. In terms of methodology, the paper controls for event day clustering by using the KP-statistic instead of the commonly used Z or BMP-statistic. We show when KP statistic is used, the negative impact of poor environmental performance on the stock returns is not as pronounced as the standard Z or BMP statistic would lead one to believe.