Environmental finance, corporate social responsibility and firm value

There has been extensive research examining the relationship between environmental initiatives by corporations and stock market reactions. The findings of these studies remain inconclusive because some research reports positive wealth effects (Shane and Spicer, 1983; Stevens, 1984; Klassen and McLaughlin, 1996; Dowell, Hart and Yeung, 2000) following the announcements of environmental actions and initiatives and others report negative or no effects at all (Jacobs, Singhal and Subramanian, 2010; Halme and Niskanan, 2001; Gilley, Worrell, Davidson III and El-Jelly, 2000; Hamilton, 1995). Moneva and Cuellar (2009) showed a significant market valuation of financial environmental disclosures based on a sample of listed Spanish companies. This paper analyzes the effect of environmental financial accounting and corporate social responsibility on the firm’s long term capital structure decision, its cost of capital and financial performance.

There is growing demand from company stakeholders based on an increased interest in environmental issues. Interested stakeholders are not only the consumers, but also financial institutions and other multinational investors that provide the bulk of the funding needed by companies for new operations and expenditures in capital assets. As a result, companies are producing environmental reports.

Financial accounting which focuses on monetary information regulated at the national and international levels is used by external investors to make profitable investing decisions. Environmental issues are becoming more of a focus and are included with the accounting systems. Such practices inform and motivate investor behavior toward linking sound environmental management with everyday business and investment decision-making. The increased interest in environmental issues and the impact of environmental issues on the financial statements of companies enables financial analysts and investors to understand the financial and other business impacts on environmental issues of the company.  The result is expected to show that the value of the firm is affected by the firm’s commitment to environmental reporting because the firm’s capital structure decisions and ultimately its cost of capital are positively related to the firm’s environmental accounting procedures. The evidence that environmental accounting influences the behavior of investors is further strengthened. Thus, good environmental disclosure will reduce the firm’s environmental risk and increase the market value of the firm. Conversely, bad environmental performance is expected to be negatively correlated with the value of the firm.