Capital markets responses to environmental performance in developing countries

Susmita Dasgupta, Benoit Laplante and Nlandu Mamingi

No 1909, Policy Research Working Paper Series from The World Bank

Abstract: Firms in developing countries are often said to have no incentives to invest in pollution control because they typically face weak monitoring and enforcement of environmental regulations. But the inability of formal institutions to control pollution through fines and penalties may not be as serious an impediment to pollution control as is generally argued, contend the authors. Capital markets may react negatively to news of adverse environmental incidents (such as spills or violations of permits) as well as positively to the announcement that a firm is using cleaner technologies. The authors assess whether capital markets in Argentina, Chile, Mexico, and the Philippines react to the announcement of firm-specific environmental news. They show that: I) Capital markets react positively ( the firms'market value increases) to the announcement of rewards and explicit recognition of superior environmental performance. ii) They react negatively (the firms'value decreases) to citizens'complaints. Environmental regulators in developing countries could 1) harness market forces by introducing structured programs to release firm-specific information about environmental performance, and 2) empower communities and stakeholders through environmental education programs.

Keywords: Microfinance; Water and Industry; Small and Medium Size Enterprises; Environmental Economics&Policies; Small Scale Enterprise; Water and Industry; Agricultural Research; Small Scale Enterprise; Private Participation in Infrastructure; Environmental Economics&Policies (search for similar items in EconPapers)
Date: 1998-04-30
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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