How Do Shareholders Respond to Sustainability Awards? Evidence from - - PowerPoint PPT Presentation

How Do Shareholders Respond to Sustainability Awards? Evidence from China

Thomas P. Lyon, Yao Lu, Xinzheng Shi, Qie Yin

Greening China

• China has become the world‟s largest emitter of GHGs
• But it is also the world‟s largest producer of PV panels, has

almost as much installed renewable energy as the US, and is the world‟s largest investor in clean energy.

• Its 12th Five-Year Plan sets many goals that will continue

to move the country forward in energy efficiency and renewables.

• How is the private sector responding to this complex set of

forces?

• We seek evidence in how the stock markets responded to

companies that won green awards.

Annual Summit of China Green Companies

Environmental News and Shareholder Value

• TRI Releases: Bad news hurts

– Hamilton (1995), Konar and Cohen (1997), and Khanna et al. (1998) found negative ARs for US firms with high TRI releases.

• Green Awards: Good news helps

– Klassen and McLaughlin (1996) found positive ARs for US firms that received green awards, especially for firms in cleaner industries. – Dasgupta, Laplante and Mamingi (2001) found positive ARs for firms that received awards in Argentina, Chile, Mexico and Philippines.

• Green Ratings: Bad news hurts, good news may help

– Gupta and Goldar (2005) found large negative abnormal returns for Indian firms in dirty industries that received poor ratings from the Green Ratings Project. – Beatty and Shimshack (2010) found that US firms rated poorly by Climate Counts received negative ARs. – Lyon and Shimshack (2011) find that US firms rated in the Top 100 by Newsweek received more positive ARs than those in the Bottom 400.

Our Research Questions

• How did shareholders respond to the news

that Chinese companies had received environmental awards?

– China Green Companies awards – Baogong Environmental Awards

• How did the response depend upon firm-

specific factors?

Basic Event Study Methodology

• 1. Identify the event of interest and define the event window
• 2. Select the sample used for analysis
• 3. Predict a „„normal‟‟ return during the event window in the

absence of the event

a) Market model b) CAPM

• 4. Estimate the “cumulative abnormal returns” (CARs)

within the event window

• 5. Test whether the CAR is statistically different from zero.
• 6. Assess determinants of abnormal returns

Initial Results and Robustness

• Abnormal returns to winners in the aggregate are

consistently negative and sometimes significant.

• Questions

– Is China‟s stock market sufficiently developed to be reliable?

• Compare against returns for firms listed on Hong Kong

exchange or NYSE

– Are the green awards credible?

• Drop 3 firms that received low scores from Rankins CSR ratings

– Can we gain additional insight by incorporating firm- specific factors?

• Size, pollution, SOE, political connections, ROA

Results Are Not Driven by Firms with Low CSR Rankings

Firms in clean industries received negative CARs

Private firms received negative CARs

Multivariate Analysis

• We have examined individual factors that affect

returns, but it is also of interest to explore their joint impact.

• We regressed CARs on several factors, including:

– Heavily-polluting industry – Size (Top 50%) – SOE (State is largest shareholder)

• Overall findings: smaller firms in cleaner

industries were hurt by the awards.

Conclusions

• In China, it seems that “good news hurts.”

– There is no evidence that green awards led to increased shareholder returns.

• For smaller firms in cleaner industries, the awards

led to negative abnormal returns

• Suggests that investors still view environmental

issues as the government‟s responsibility, and not that of the private sector.

– For big dirty firms, green awards are neutral. – For small clean firms, green awards show firms are wasting resources.