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Understanding Variations in Stock Market Reaction to Announcements of Strategic Green
Alliances
Anna Sadovnikova, DeGroote School of Business, McMaster University, Canada
Ashish Pujari, DeGroote School of Business, McMaster University, Canada
An Extended Abstract
In the past decades, the ideas of sustainability in business have rapidly grown in influence among
both academics and practitioners. Yet, it remains an open question whether corporate
environmentalism can create value for a firm. Prior studies exploring the relationship between
environmental management and firm financial performance provide mixed and inconclusive
results.
Firms increasingly collaborate with diverse stakeholder groups to address complex sustainability
issues. Strategic partnerships represent a fairly well-researched domain in interorganizational
management literature. However, the issue of whether traditional theories can explain value
creation mechanisms in green partnerships integrating pure economic considerations and social
values not readily quantifiable in monetary terms is still unexplored. Given the importance of
cooperative strategies in the contemporary marketplace and responding to the call about more
research into a corporate sustainability – corporate financial performance relationship, this paper
investigates the effect of announcements of strategic green alliances on firm market value.
Strategic green alliances are defined as voluntary arrangements between two or more firms for
exchanging, sharing, or co-development of environmentally-sustainable (green) products,
technologies, or services to pursue a set of strategic sustainability goals of common interest or
address critical business needs.
According to the natural resource-based view (NRBV), a firm enjoys sustained competitive
advantage when firm’s critical resources are not only inimitable and non-substitutable, but
maintained and renewed over time. NRBV further argues that a firm can secure long-term
resource maintenance if it practices the eco-sustainable activities of a) pollution prevention, b)
product stewardship, and c) sustainable economic development. We propose that strategic green
alliances provide an essential mechanism to implement and practice these eco-sustainable
activities because alliance partners a) can align their production operations to utilize each other’s
by-products and waste, b) get better control over and improve environmental performance of
products “from cradle to grave”, co-develop substitutes for depleting/non-renewable materials,
and c) promote sustainable resource consumption practices in collaborations with other
influential market constituents (e.g. government agencies). Based on that, we hypothesize that
announcements of strategic green alliances are positively related to firm’s market value (H1).
In an alliance, firms may follow the reactive green orientation (focusing on reduction of negative
impact on the environment through safe waste management after it is created) or adopt the
proactive green orientation (focus on transforming value chain to prevent harm to the
environment). We hypothesize that an announcement of a strategic alliance with proactive
green orientation will result in more positive stock market reaction than that of an alliance
with reactive green orientation (H2) because a reactive firm is limited in the choice of partners
among only those firms able to handle its waste in a safe way, whereas a proactive firm is free to
collaborate with any partners (supplier, distributor, university, etc.) to transform its value
creation chain to make it more sustainable. Thus, a proactive firm can select the most
advantageous alternatives in the market and implement a more diverse, sophisticated set of ecosustainable activities providing a greater basis for sustained competitive advantage.
A firm’s environmental reputation constitutes a valuable strategic asset and affects firm
performance. High environmental reputation indicates that a firm has already implemented and
practiced some eco-sustainable activities. Prior studies show that as a firm improves its
environmental performance, further advancements in green practices become progressively
expensive due to increasing marginal costs and slowing rate of improvements. Therefore, for the
firm with high environmental reputation, ceteris paribus, a value creation potential of a strategic
green alliance will be lower than that for the firm with lower environmental reputation. Firms
with low environmental reputation are more likely just to start practicing eco-sustainable
activities. They are at the beginning of the “green efficiency” curve, and many low-cost ecosustainable practices can be implemented in a green alliance to generate substantial cost savings.
Based on that, we hypothesize that the magnitude of change in firm market value in response
to strategic green alliance announcement will be negatively affected by firm’s environmental
reputation (H3a).
Industries vary in their pollution intensity. In the heavily polluting ( “dirtier”), industries, firms
need to undertake more substantial changes to their operations to improve environmental
performance, in comparison to the industries with lower emission levels. In “dirty” industries,
high environmental reputation signals that a firm must have already carried out a significant
modernization of technologies and equipment and run extensive R&D programs that go far
above and beyond low-cost “end-of-pipe” pollution control measures, and further environmental
improvements will be increasingly expensive. Based on that, the effect that firm’s
environmental reputation has on a change in firm market value in response to an
announcement of a strategic green alliance will be negatively moderated by the level of
industry pollution intensity (H3b).
The hypotheses are tested with the event study methodology and a cross-sectional analysis. A
combination of parametric and non-parametric tests is used to test the significance of the effects
in question. Information about strategic green alliances is drawn from the KLD Research &
Analytics and Corporate Register databases. The FACTIVA, LexisNexis, newswire services, and
companies’ websites are searched to identify the dates of the first information releases and to
control for confounding financial and management-related events. The obtained data set consists
of 390 alliances formed by 82 firms in 2005-2007. The average number of alliances per firm is
4.8, whereas a few corporations like Chevron, Ford Motor, and PG&E have more than 15 green
alliances each. The announcements are classified based on the type of green alliance
(Manufacturing, Marketing, R&D, Green Community, Green Policy). Each alliance type
constitutes approximately equal proportion of the data set. The industries are represented by SIC
2000-4999. Data on firm’s environmental reputation is obtained from the KLD Research &
Analytics database. Data on industry pollution levels is drawn from the U.S. Census Bureau’
Pollution Abatement Costs and Expenditures Report 2005.
H1: The aggregate sample (n=390) and the alternative subsamples by the alliance type are
analyzed. For the aggregate sample, abnormal returns are weakly positive, (+ 0.05%) and
(+0.03%) for day 0 and for the event window (0, +1) respectively, but not significant. Green
marketing partnerships generate strong positive abnormal returns (+0.23%) on the announcement
day and (+0.27%) for the event window (0; +1), p<0.05 level. The Green R&D subsample
reports negative abnormal returns (-0.25%) on day 0 and (-0.34%) for the window (0; +1),
significant at 0.05 level. For green manufacturing, green community, and green policy alliances,
the results are positive, but not significant. The test of mean difference across alliance types
significant at p<0.05 confirms the findings above.
H2: Because of limitations imposed by secondary data, H2 is tested for the Green R&D
subsample only. Statements of goals of green R&D alliances allow for the most accurate
differentiation between the two strategic orientations. The R&D sample is split into proactive
“Harm Prevention” R&D (n=62) vs. reactive “Harm Minimization” R&D (n=11) subsamples.
The “Minimization” subsample reports substantially lower abnormal returns than the
“Prevention” subsample, (-0.36%), p<0.1 vs. (-0.23%), p<0.05 for day 0 and (-1.08%),p<0.01
vs.(-0.21%), p<0.1 for event window (0;+1), respectively. A mean difference test significant at
p<0.1 confirms the finding above.
H3a, b: To investigate the effect of firm’s environmental reputation and industry pollution
levels, cross-sectional analysis is performed. To address the problem of heteroscedasticity,
weighted least square regression is used. The overall R squared is 0.24. Firm size and overall
firm reputation (p<0.1) along with the interaction term of firm environmental reputation and
industry pollution intensity (p<0.05) are significant, and the interaction term has a negative sign.
Simple effects of the firm environmental reputation and industry pollution intensity are not
significant. The effect of firm’s environmental reputation is negatively moderated by the level of
industry pollution levels. In “dirtier” sectors of economy, firms with higher environmental
reputation experience stronger negative reaction of the stock market towards green alliance news
than their more polluting counterparts.
This research offers contributions in substantive, empirical and managerial areas. Substantively,
it adds to the growing stream of research on the relationship between corporate sustainability and
the firm financial performance. Also, it builds on and extends the “value creation” perspective in
interorganizational research literature. Empirically, the research utilizes a unique data set of
strategic green alliances based on extensive search of corporate environmental reports and
collected manually. Managerially, the research focuses on a fairly recent, but growing trend in
corporate world – cooperative green initiatives. This research helps managers understand the
value creation potential of strategic green alliances and implications of choosing different types
of green cooperative arrangements. The results show that strategic green alliances can create
value for a firm and the relationship is moderated by the alliance orientation (the scope of
activities), firm characteristics (strategic green orientation and environmental reputation), and
industry characteristics (pollution intensity levels). Managers can consider strategic green
alliances as a tool to maximize firm market value, but need to act cautiously as investors tend to
penalize risky investments into corporate sustainability, e.g. green R&D collaborative projects.
Managers can secure higher stock market returns if they design firm operations with green
proactivity in mind which is better received by investors than a reactive strategic stance.
Companies with low environmental reputations performing in “dirtier” industries, ceteris
paribus, enjoy a more positive reaction of investors in response to green alliance news than their
more socially-responsible counterparts.
References are available on request. For further information contact:
Anna Sadovnikova
Ashish Pujari
DeGroote School of Business, DSB A210
DeGroote School of Business, DSB 205
McMaster University
McMaster University
1280 Main Street West
1280 Main Street West
Hamilton, Ontario, L8S 4M4, Canada
Hamilton, Ontario, L8S 4M4, Canada
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Phone +1(905)525-9140 ext. 27635
Fax +1(905)523-1991
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Email: [email protected]
Email: [email protected]