Value relevance of cost of environmental damage

Joseph Arthur

Studies in Economics and Finance, 2024, vol. 42, issue 2, 373-393

Abstract: Purpose - This paper aims to assess whether environmental (carbon) damage costs affect firm value and ownership. Design/methodology/approach - This paper uses fixed-effects panel models and difference-in-differences design to tease out essential effects based on 69,352 sampled firm-year observations from 2004 to 2022. It uses Trucost data on the dollar cost of environmental damage at the firm level. Findings - Using proprietary environmental damage costs data on US firms from Trucost, this paper finds that firm value is negatively associated with environmental (carbon) damage costs, with additional tests suggesting that the association is causal. Institutional investors increase their relative holdings following environmental shocks that reveal financial benefits to internalizing or reducing these costs. Originality/value - Knowing the significance of the cost of environmental damage at the firm level is important for corporate managers, regulators and investors’ decision-making. However, this has yet to be researched. This paper contributes to the understanding of financial economics.

Keywords: Environmental damage costs; Carbon; Institutional investors; Firm value; D62; G12; G23; G30 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:sefpps:sef-05-2024-0300

DOI: 10.1108/SEF-05-2024-0300

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