Shareholder response to voluntary environmental initiatives : does committing to voluntary environmental initiatives improve company value?

Abstract

This thesis seeks to expand the knowledge of how environmental performance effect financial performance. More specifically, we examine shareholders’ reaction on announcement when companies commit to the RE100-initiative, an initiative committing companies to use 100% renewable electricity within a targeted year. We believe that an examination of this initiative gives a deeper understanding of how shareholders perceive an engagement in a voluntary environmental commitment. Currently, there is no consensus reached in the academic community regarding this topic. We aim to contribute to the research by performing an event study on stock price followed by a cross-sectional OLS. We test the hypothesis; whether a commitment to the RE100-engagement decreases or increases the stock price at announcement. Empirically, we use a sample of 67 public companies committed to RE100. Our sample consists of large global companies based in the United States and Europe. Every company has unique announcement dates and the data set is therefore customized to each company. Our results suggest that committing to RE100 does neither increase nor decrease the stock price on the announcement date of the commitment on average. However, when we examine firm fixed effects, we identify two factors affecting the reaction among shareholders. We find that a consolidated ownership structure have a positive effect on share price. Put differently, it seems like when the shareholders’ and CEO’s incentives are aligned, the engagement is perceived to have a more positive effect on company value. Further, American companies experience a more positive effect on announcement compared to European companies. We observe that European companies are more focused on environmental issues and the transformation towards increased use of renewable energy. A possible interpretation of our finding is related to the first mover advantage where the benefit of being a first mover might have been played out in Europe, while US companies can still be able to gain from this advantage.