Do Corporate Global Environmental Standards Create or Destroy Market Value?

TLDR

Whether a stringent global corporate environmental standard is a competitive asset or liability for multinational enterprises in emerging markets is debated. The study aims to discuss plausible reasons why adopting a single stringent global environmental standard leads to higher market values. Firms adopting a single stringent global environmental standard have higher market values (Tobin’s q) than those relying on less stringent host‑country standards, indicating that externalities are incorporated into firm valuation and that lax regulations may attract poorer quality firms.

Abstract

Arguments can be made on both sides of the question of whether a stringent global corporate environmental standard represents a competitive asset or liability for multinational enterprises (MNEs) investing in emerging and developing markets. Analyzing the global environmental standards of a sample of U.S.-based MNEs in relation to their stock market performance, we find that firms adopting a single stringent global environmental standard have much higher market values, as measured by Tobin's q, than firms defaulting to less stringent, or poorly enforced host country standards. Thus, developing countries that use lax environmental regulations to attract foreign direct investment may end up attracting poorer quality, and perhaps less competitive, firms. Our results also suggest that externalities are incorporated to a significant extent in firm valuation. We discuss plausible reasons for this observation.