Download Environmentally responsible firms experience lower stock market

Environmentally responsible firms experience lower stock market risk than
environmentally irresponsible firms
EXECUTIVE SUMMARY
Firms that appear environmentally responsible experience less company-specific stock market risk. This paper
offers firms a clear motivation for acting responsibly. Further, this study shows that firms can manage others’
impressions of their environmental responsibility and shape this risk.
BACKGROUND
Up to 80% of firms’ stock price instability is based on
risks that affect a particular firm, such as negative
earnings reports, labour strikes and oil spills. Firms
with high risk have trouble earning stable cash flows
and entering new markets. Firms often try and manage
this risk by issuing press releases and managing the
impressions that investors hold of the firm.
legitimacy to test whether these results apply beyond
highly polluting industries. It would also be useful to
test for non-linear relationships between
environmental legitimacy, impression management
and unsystematic risk, and whether investors will
more likely act on information of companies with low
environmental legitimacy.
METHODS
FINDINGS
1) Environmentally responsible firms experience less
company-specific stock risk than irresponsible
firms.
2) Firms can manage this risk by the information
they release to the press, in particular:
• Responsible firms that try to manage others’
impressions of the firm magnify their risk.
• Irresponsible firms that try to manage others’
impressions of the firm dampen their risk.
The constructs used in this paper were environmental
legitimacy, measured as the Janis-Fadner coefficient;
unsystematic risk; and, impression management,
measured by press releases. The theoretical model
applied institutional theory. The sample included 100
firms from heavily polluting industries over the period
of 1990-1994. Media accounts from the Wall Street
Journal were used to assess firm environmental
legitimacy. Articles from the Press Release Newswire
electronic archive were used to calculate impression
management. Results were calculated using regression
analysis and a two-way ANOVA.
IMPLICATIONS FOR MANAGERS
• Firms are now given clear reasons for being
perceived by others as being responsible, in
particular, lower company-specific risk. This will give
them easier access to equity capital.
• For those firms seen as already being
environmentally responsible, it is best for these firms
to not tout their green achievements and keep
relatively silent. Investors are already rewarding
them.
CITATION
Bansal, Pratima, & Clelland, Iain. (2004). Talking
Trash: Legitimacy, Impression Management, and
Unsystematic Risk in the Context of The Natural
Environment. Academy of Management Journal,
47(1): 93-103. Full article source.
SUMMARIZED BY
Tima Bansal & The Network Team
• Those firms who are not seen as environmentally
responsible can merit by offering more information
about their greening practices.
Want more? Visit the Knowledge page at www.nbs.net
IMPLICATIONS FOR RESEARCHERS
Research could apply a wider measure of firm
We want to know what you think. E-mail your
comments to: [email protected]