Environmental risk management and the cost of capital

Sharfman, Mark P.; Fernando, Chitru S.

doi:10.1002/smj.678

Cited by 1,117 publications

(806 citation statements)

References 74 publications

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“…Since pollution levels are increasingly critical, any environmental incident may tarnish a firm's reputation in addition to subjecting it to substantial legal costs and fines (Eiadat et al 2008) which can have significant impacts on financial performance. As a firm makes strategic investments that reduce emissions and pollution, it mitigates its risk of litigation (Sharfman and Fernando 2008). All these additional benefits could indicate that improved EP could provide more than proportional improvement in FP in the long term, establishing the existence of curvilinear positive impacts.…”

Section: Discussionmentioning

confidence: 99%

“…Investments in EP (e.g., waste reduction) can yield positive returns in terms of FP initially, but it will be encouraging for managers that accumulated expertise on existing environmental investments could lead to more accelerated improvements in FP. It can provide insurance against litigations (Sharfman and Fernando 2008). Such proactive investments in improving EP can also be useful to managers to meet the obligations of environmental regulations and even stay ahead of the regulations (Porter and Linde 1995).…”

Section: Theoretical and Managerial Implicationsmentioning

confidence: 99%

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Understanding Complexity: the Curvilinear Relationship Between Environmental Performance and Firm Performance

Ramanathan

2016

J Bus Ethics

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The nature of the relationship between environmental performance (EP) and firm performance (FP) of corporations is a long standing and contentious issue in the literature. This study is intended to advance this debate by arguing for the existence of curvilinear relationship and empirically testing the same using survey data on UK manufacturing firms. FP is captured in terms of growth in sales and market share. Our results show evidence for a quadratic relationship-as firms improve their EP, they seem to achieve much higher levels of FP. These results are consistent with the resource-based view of a firm; as firms engage in EP activities, they are able to gain inimitable knowledge that helps in further learning to further improve performance. Based on our results, we suggest that new studies focus on strategies to extend the period of increasing returns and maximizing the benefits of the positive association between EP and FP.

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Section: Discussionmentioning

confidence: 99%

Section: Theoretical and Managerial Implicationsmentioning

confidence: 99%

Understanding Complexity: the Curvilinear Relationship Between Environmental Performance and Firm Performance

Ramanathan

2016

J Bus Ethics

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“…This research stream implicates the risk-management approach, emphasizing that a firm's involvement in innovation and environmental sustainability positively impacts its values [26,27], resulting in null or negative trade-off costs. Accordingly, the "negative" trade-off costs would be basic motivation for firms to partake in activities relevant to both innovation and sustainability issues.…”

Section: Eco-innovation Approachmentioning

confidence: 99%

“…To investigate the environmental performance, we chose the KLD dataset because it has been popularly used by CSR researchers [1,2,5,27,36,37]. We started sampling with the firms from the KLD database by identifying all large U.S. public firms whose environmental performances were evaluated by KLD.…”

Section: Sample and Datamentioning

confidence: 99%

Curvilinear Relationship between Corporate Innovation and Environmental Sustainability

Lee

Kim

2017

Sustainability

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This paper proposes and tests the impacts of firms' innovation activities, such as patents, on their involvement in environmental sustainability, such as environmental performance. Combining resource allocation and eco-innovation perspectives assuming constant levels of trade-off costs, this study proposes diminishing trade-off costs between corporate innovation and environmental sustainability. Specifically, this research hypothesizes a U-shaped relationship, suggesting that a firm will suffer trade-off costs between innovation and environment-oriented activities up to a certain level, and that once a firm accumulates an adequate level of innovation, it may reduce trade-off costs, caring more for environmental issues. A proposed hypothesis is supported by empirical testing of a sample of 11,657 firm-year observations with 1564 firms, spanning from 1991 to 2010. We also found that corporate patenting activities are relevant to undesirable impacts on environmental performance overall, instead of satisfying outcomes. We suggest that firms and managers should care for environmental sustainability issues once they accumulate an adequate level of innovation assets through patenting activities.

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“…The literature on the effects of corporate sustainability on firm value has become extensive in recent years (e. g., Dowell et al, 2000;Godfrey, 2005;Godfrey et al, 2009;Sharfman and Fernando, 2008). However, the lines of argument that can be found are similar: If it is assumed that management acts rationally and mainly on the behalf of shareholders, introducing corporate sustainability is either supposed to enhance expected cash flows, reduce investment risk, or both.…”

Section: The Effect Of Corporate Sustainability On the Market Value Omentioning

confidence: 99%

Sustainability Reporting Out of a Prisoner's Dilemma

Kaspereit

2012

SSRN Journal

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Listed firms increasingly strive for a sustainable appearance, which has made sustainability reporting very popular in recent years. This would be completely rational if sustainability reporting could enhance shareholder value. This paper investigates from a theoretical perspective which conditions are sufficient for the individual and collective rationality of sustainability reporting. The analysis leads to the conclusion that, due to the competition between firms, sustainability reporting generates a separation equilibrium as long as the reporting costs are proportional to the reported level and the marginal costs of reporting differ with the true level of sustainability. Although it might be preferable, a pooling equilibrium with no sustainability reporting cannot be sustained, which is a result of the so-called prisoner's dilemma that firms find themselves caught within. The most important practical implication of the model is a call for external auditing with high assurance levels to ensure an efficient separation of highly and weakly sustainable firms.

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Environmental risk management and the cost of capital

Cited by 1,117 publications

References 74 publications

Understanding Complexity: the Curvilinear Relationship Between Environmental Performance and Firm Performance

Understanding Complexity: the Curvilinear Relationship Between Environmental Performance and Firm Performance

Curvilinear Relationship between Corporate Innovation and Environmental Sustainability

Sustainability Reporting Out of a Prisoner's Dilemma

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