Proponents of self-regulation programs argue these programs create incentives for participating firms to adopt socially positive behavior. These programs, by limiting its membership to firms that commit to RC’s goals, including pollution prevention, allows member firms to benefit from the positive reputational effect of being socially responsible. However, one concern about regulatory programs is that firms participate in these programs simply to signal green, but fail to reduce their pollution. Indeed our previous work, Gamper-Rabindran and Finger (2010), finds that RC participants did not reduce their pollution relative to statistically equivalent non-participants.
In our current study, we ask – what is the impact of participation of RC on firms’ market value and does participation allow firms to be rewarded for changes in environmental performance? A finding that participation raises firms’ market value would yield two insights. First, positive reward provides one strong motivation for firms to participate in RC and would suggest that such programs are financially sustainable in the long-run. Second, a finding of positive reward from the market for RC participation in our current study, juxtaposed with our previous finding that RC participation failed to reduce pollution, provides an insight into the nature of the market’s valuation. Such a finding would suggest that the market rewards the benefits from the perception of green and the market’s valuation does not necessarily reflect true reductions in firms’ potential liability stemming from reductions in pollution.
Additionally, one of the motivations for the formation of RC was that firms believed public opinion was being dictated by the industry as a whole, and ignored the behavior of individual firms. By examining the impact of participation in RC on the market valuation of environmental performance, we can test whether publicity from the program allows firms to capture greater benefits from reducing pollution or providing some other public good. This would suggest that participants may continue to improve their performance relative to the improvements they would have otherwise made.
We estimate the impact of RC participation on firms’ market value measured by Tobin’s q. We apply General Methods of Moments, using instrumental variables to control for self-selection into RC. We construct a panel of approximately 200 firms that own over 1,000 plants in the chemicals sector between 1988 and 2001. Our sample is restricted to publicly owned firms, whose financial data is reported in Compustat. Firms’ pollution and employment at their chemical plants are from the Toxic Release Inventory (TRI) and Dun and Bradstreet (D&B), respectively.