۱- Introduction

۲- Background and hypothesis development

۳- Sample and model development

۴- Empirical results

۵- Concluding remarks

References

Abstract

Greenhouse gas (GHG) emissions are perceived to have negative consequences for society at large by contributing to potential climate change and represent a potential cash drain from firms from exposure to future regulatory, abatement, and compliance costs. Beginning in 2010, US companies are required to report their GHG emissions to the Environmental Protection Agency (EPA). We utilize these data for 2010–۲۰۱۴ to examine whether the possible adverse firm value impact of these GHG emissions is alleviated or exacerbated by the firm’s reputation for corporate social responsibility. Our findings suggest that there is no halo effect, i.e., a firm’s reputation for social responsibility (as reflected in its CSR score) does not protect the firm from the adverse firm value effects of GHG emissions. Rather, our findings suggest a fallen angel effect, i.e., for any given level of GHG emissions, the higher the firm’s CSR score, the greater the adverse impact on firm value. In other words, the decline in firm value due to the adverse impact of GHG emissions is compounded by the hit to the firm’s reputation for corporate social performance. Our paper contributes to the sparse prior US literature on the firm value effects of GHG emissions. Further, by providing scholarly evidence on the existence of a fallen angel effect, our findings suggest that boards and managers of firms that provide voluntary CSR disclosures cannot afford to be complacent about their GHG emissions.

Introduction

Although corporate social responsibility (CSR) appears to deviate from maximizing shareholder wealth (Friedman, 1970), prior research (e.g., Elliott et al., 2014; Gregory et al., 2016) suggests that a reputation for responsible social performance can endow a firm with a competitive advantage that is reflected in a higher firm value. Relatedly, because of their potential adverse impact on the environment (e.g., climate change), corporate greenhouse gas (GHG) emissions may be viewed as an element of negative, if not irresponsible, social performance (Huang and Watson, 2015). In recent research, Griffin et al. (2017) and Matsumura et al. (2014) use data obtained from US firms’ voluntary disclosures of GHG emissions to the Carbon Disclosure Project (CDP) as well as estimates of GHG emissions for non-disclosers to suggest that investors in US equity markets penalize GHG emitters.1 Separately, beginning in ۲۰۱۰, the US Environmental Protection Agency’s (or EPA’s) Greenhouse Gas Reporting Program (GHGRP) requires US fossil fuel suppliers, direct GHG emitters and industrial gas suppliers, to report their GHG emissions to the EPA. In this study, the research question we address is whether the adverse impact of EPA-mandated GHG emission data on firm value is attenuated or exacerbated by the firm’s reputation for corporate social responsibility. Relative to prior US-based GHG research (e.g., Griffin et al., 2017; Matsumura et al., 2014), our use of the standardized and uniformly reported mandatory EPA GHG emissions data allows us to examine actual (rather than estimated) GHG emissions and firm value effects for larger firms as well as for smaller firms that do not voluntarily report GHG emissions to the CDP. As discussed later in the paper, our findings with respect to the valuation effects of mandatory GHG emission disclosures are consistent with prior findings in the literature with respect to such voluntary disclosures. Hence, rather than focus on the main effect, i.e., the valuation effect of mandatory GHG emission disclosures alone, we focus on the interaction effect between firms’ GHG emissions and their reputation for social responsibility. In effect, the research question we examine is whether a firm’s reputation for social responsibility (as reflected in the firm’s CSR score) has a cushioning (or “halo”) effect that protects the firm against the adverse market effects of GHG emissions. Alternatively, for firms with a reputation for social responsibility, the GHG emissions could have a disillusioning (or “fallen angel”) effect that exacerbates the adverse market effects associated with the EPA-mandated GHG data.