Investigating the relationship between firms’ carbon efficiency and stock market performance

Abstract

When it comes to the relationship between corporate environmental and financial performance, the existing literature yields contradictory insights. Therefore, in order to contribute towards a more cohesive understanding of such relationship, this study aimed to examine whether there is a statistically significant relationship between firms’ carbon efficiency levels and their stock market performance, and if the nature of such relationship is linear or non-linear. This was achieved through OLS estimation of different sets of multiple regression models featuring Tobin’s Q and returns as dependent variables which represent stock market performance, along with linear and non-linear measures of carbon efficiency as independent variables. The dataset used comprises 288 listed EU firms equally spread over four sectors. In summary, for most of the models estimated, the relationship was found to be insignificant. However, instances of significant linear and non-linear associations were found. Considering the models where a significant relationship prevailed, the linear association appears to be negative whilst the non-linear association appears to be positive and, therefore, U-shaped. This implies a positive association amongst companies with high carbon efficiency, and a negative association amongst companies with low carbon efficiency. The change from negative to positive association with increasing carbon efficiency may be due to the strategies used to address environmental concerns, where it may be that proactive firms incur less costs and more benefits compared to companies that employ reactive strategies. Moreover, stakeholders tend to reward companies’ efforts to boost their carbon efficiency when it has been previously higher than a certain level