ANALYSIS

Can capital markets create incentives for pollution control?

Paul Lanoie a, Benoıˆt Laplante b,*, Maite ́ Roy a

a E ́ cole des Hautes E ́ tudes Commerciales, Montre ́al, Que ́bec, H3T 2A7, Canada b The World Bank, Policy Research Department, 1818 H Street, N.W., Washington, D.C. 20433, USA

Received 21 January 1997; received in revised form 12 April 1997; accepted 16 April 1997

Abstract

It has been observed that upon trading-off the costs and benefits of pollution control, profit-maximizing firms may

choose not to invest their resources in pollution abatement since the expected penalty imposed by regulators falls

considerably short of the investment cost. Regulators have recently embarked on a deliberate strategy to release

information to markets (investors and consumers) regarding firms’ environmental performance in order to enhance

incentives for pollution control. In this paper, we analyze the role that capital markets may play to create such

incentives. Evidence drawn from American and Canadian studies indicates that capital markets react to the release

of information, and that large polluters are affected more significantly by such release than smaller polluters. This

result appears to be a function of the regulator’s willingness to undertake strong enforcement actions as well as the

possibility for capital markets to rank and compare firms with respect to their environmental performance. © 1998

Elsevier Science B.V. All rights reserved.

Keywords: Capital markets; Pollution control

1. Introduction

A large number of authors have pointed out the

lack of appropriate monitoring activities and

weak enforcement pertaining to the implementation of environmental regulations. Resources

devoted to monitoring activities allow regulators

to perform only a limited number of those activities. Moreover, when compliance with the standards is found to be lacking, it is generally

acknowledged that fines or penalties (as imposed

by regulators and courts) are too low (compared

to pollution abatement costs) to act as effective

deterrents. For example, Russell (1990) writes:

‘Efforts to monitor regulated behaviour appear to

* Corresponding author. Fax: +1 202 5223230. have been inadequate to the task—a very difficult

0921-8009/98/$19.00 © 1998 Elsevier Science B.V. All rights reserved.

PII S0921-8009(97)00057-8
g 

the United States Environmental Protection

Agency (see GAO, 1987, 1991, 1993, 1994).

If indeed the expected penalty for non-compliance, as imposed by environmental regulators and

courts were so low, one would have difficulty in

explaining the generally high level of compliance

with regulation in developed countries, and the

very large variance in the environmental performance of plants in developing countries. Hence

there must be other incentives than those provided by regulators and courts that could explain

a polluter’s environmental performance. As such,

the potential role and impact of local communities and markets (including consumers and investors) are the object of increasing scrutiny.

Afsah et al. (1996) have recently developed a new

paradigm for controlling industrial pollution in

developing countries which explicitly includes, as

sources of incentives, local communities and markets. Once the role and potential impact of these

agents are properly acknowledged, once the conditions under which the action of these agents

may be effective are identified, fines and penalties

imposed by regulators and courts may not appear

to be in many circumstances the most appropriate

or effective incentives for pollution control. In

fact, the USEPA has recently pointed out that

‘EPA’s job should grow from primarily the ‘enforcer’ to include greater emphasis on helping

citizens make informed choices in their daily lives’

(EPA, 1991).

Hence, while there is a growing concern that

fines and penalties imposed on agents out of

compliance are not severe enough to have a deterrence effect, some authors have challenged the

conclusion that polluters therefore have no incentives to comply with environmental standards. In

particular, in view of the increasing facility of

access and exchange of information, markets

(both consumers and investors) bear an increasing

amount of attention as to their capacity to generate incentives for pollution control. A significant

amount of research and experiments remains to

pypp, 

the proper role of the regulator to empower these

agents. In this paper, our purpose is to discuss

and examine how in6estors have reacted to the

release of public information regarding the environmental performance of specific plants, as observed and measured by fluctuations on the stock

market. [A related but different question of interest is whether or not firms with good environmental performance have a higher market valuation

than firms with bad environmental performance,

other things being equal. On analysis of this nature, see Cormier et al. (1993) and the references

therein.] While some of this information is revealed through regular coverage by newspapers, it

also includes a deliberate use and release of information by regulators regarding the environmental

performance of individual plants.

In the next section, we discuss the nature of the

role of capital markets with respect to providing

incentives for pollution control. In Section 3, we

briefly describe the methodology typically used to

measure the reaction of investors to the release of

environmental information. In Section 4, we review the results of the studies that have examined

the reaction of investors to the announcement of

environmental incidents (such as lawsuits, fines,

accidents, etc.), or list of polluters (e.g. Toxics

Release Inventory). We also present the results of

a new study that examines the reaction of investors to the publication of lists of firms in

British Columbia that either fail to comply with

environmental regulations or that are of concern

to the Ministry of the Environment of British

Columbia. We conclude in Section 5.

2. The role of capital markets

Unanticipated events, or new information may

lead capital markets to revise their expectations

regarding the profitability of an enterprise.

Changes in market values thus provide estimates

of changes in the net present value of expected
gp

posed by regulators and courts are generally set

too low to act as effective deterrents and prevent

violation of environmental regulations. For example, in the United States, the EPA pursues civil

enforcement actions (as opposed to administrative

penalties or criminal enforcement actions) to respond to the more serious or recalcitrant violators. In FY1990 (fiscal year), civil penalties

totalled $61329237 imposed in 1400 cases, for an

average penalty of $43806. In FY1991, civil

penalties were $72835251 in 1419 cases; the average penalty increased to $51330. The average

penalty imposed under the Clean Water Act has

steadily increased since 1986 to reach $405436 in

1991. The maximum civil penalty imposed in

FY1990 was $15000000 and $6184220 in

FY1991. In Canada, data on the number of prosecutions, convictions, and penalties are sparse and

not necessarily comparable across provinces. For

example, upon completing an extensive study of

the environmental regulation in the Canadian

pulp and paper industry, Sinclair (1991) wrote

‘the data available on prosecutions are limited’.

Nonetheless, it is interesting to note that penalties

in Canada are typically much lower than in the

United States. In Alberta, 14 prosecutions were

initiated by the Attorney General’s Office in 1990;

total fines levied were $37275 against 8 companies. In Ontario, total fines levied increased from

$605668 in 1985-1986 to $3633095 in 1992. Given

the number of convictions, average penalties increased from $9330 to $14250. As noted by Saxe

(1989), despite the increase, fines remain low. In

British Columbia, 79 convictions were obtained

over the period April 1–September 30, 1992; average fines were then slightly less than $3000 (Environment Policy and Law, March 1993). More

recently, over the period October 1 1995 to March

30 1996, total fines of $219200 were levied in

British Columbia on 116 convictions for an average of less than $2000 (the maximum fine was

$20000 and there were 59 fines of $500 or

smaller). Criminal actions, in which the regulator

py 

information leads them to revise their expectations regarding future production costs (including

the pollution control costs) or the ability of the

firm to generate revenues at the levels originally

expected. Information about the pollution efficiency of the firm and its environmental performance may act as a signal for its expected

long-term profitability: a superior environmental

performance may indicate a greater ability to

increase revenues and generate cost savings. Environmental information may play an important

signalling role. It is interesting to note that this

information may concern solely a given enterprise

or may directly or indirectly allow a comparison

of the environmental performance of an enterprise

to the performance of other firms (such as lists of

firms ranked in one way or another by their

environmental performance). Information of both

natures, which we may call indi6idual information

and comparati6e information respectively, may affect expectations regarding production costs and

revenues. However, we would argue that indi6idual information is more likely to have a relatively

larger impact on expectations of production costs

(as opposed to revenues), while comparati6e information is more likely to have a larger impact on

expectations of revenues (as opposed to production costs).

Indeed, in most cases individual information

takes the form of an announcement of an event

that is generally not favourable to the enterprise

such as a violation of regulation, the announcement of an incident causing damages to the environment (such as a spill), the announcement of a

lawsuit against the enterprise, etc. As mentioned

earlier, given the size of the penalties imposed by

courts and regulators, it is unlikely upon such an

announcement that changes in market values, if

any, would solely reflect expectations regarding

the size of a potential penalty. These changes are

more likely to reflect expectations that the firm

may be the target of closer scrutiny and further

enforcement actions, that citizens and community
tion control. We would therefore expect changes

in market value, if any, to be larger (potentially

much larger) than traditional penalties imposed

by courts and regulators. Though in a different

context, Jarrell and Peltzman (1985) found that

capital markets penalise producers of recalled

drugs and cars far more than the direct costs. A

further question of interest therefore is whether or

not these large observed changes in market value,

caused by the provision of new information,

provide enough incentives for investments in pollution control.

While individual information may also lead

consumer groups to boycott the good(s) produced

by the enterprise, thus leading to a revision of the

expectations on future revenues, the degree of

substitution that is taking place may be limited

due to the absence of information regarding the

environmental performance of other enterprises.

On the contrary, comparative information which

compares firms with bad performance to those

with good performance is more likely to allow this

substitution to take place since it gives an alternative to those consumers who want to substitute

away from the firms with a bad environmental

performance. Moreover, as pointed out by Porter

and van der Linde (1995), since pollution efficiency is often associated with overall production

efficiency, comparative information indirectly

(and perhaps imperfectly) allows a comparison of

the overall efficiency of the enterprise. This explains why we expect comparati6e information to

have a greater impact on expectations of future

revenues than indi6idual information.

Whether or not markets react to the release of

new information regarding the environmental performance of firms remains ultimately an empirical

issue. In the next section, we briefly discuss the

methodology used to measure market reactions.

In Section 4, we present a number of empirical

studies and discuss the results of those studies in

view of the hypotheses developed above.

pp

ciently efficient to evaluate the impact of new

information (events) on expected future profits of

the firms. The methodology was originally developed by Fama et al. (1969) and Fama (1976). It

has been used to analyze the reaction of investors

to numerous events of a different nature: product

liability suits (Viscusi and Hersh, 1990), airline

crashes (Borenstein and Zimmerman, 1988;

Chance and Ferris, 1987) and workplace safety

violations (Fry and Lee, 1989).

The reaction to the announcement of an event

is obtained by predicting a ‘normal’ return for

each firm during an ‘event window’ (usually the

day prior to the event, the day of the event, and a

number of days after the event), and then subtracting this predicted normal return from the

actual return observed on those days following

the announcement of the event. Normal returns

are generated by estimating a version of the capital assets pricing model (CAPM):

Rit=(1−bi)Rft+bi Rmt+eit (1)

where Rit is the rate of return on security i for day

t; Rft is the rate of return on a risk-free asset; Rmt

is the rate of return of a market index (such as the

Dow Jones market index); bi is the estimated

parameter; and eit is the error term for security i

on day t. The CAPM model is estimated for each

firm over a number of days before the event

window (usually between 120 and 210 days).

In the absence of unexpected information, the

relationship between the firm’s return, the market’s return and the return of the risk-free asset

should be unchanged. Hence, these returns can be

used to forecast the normal return for the firm. A

prediction error is generated when unexpected

information affects the return for the firm without

affecting the market’s return and the risk-free

asset’s rate of return. The prediction error, commonly referred to as the abnormal return (AR)

for security i at time t (ARit), is computed as the

following:
puted across firms:

AARt=(1/Nt) %

Nt

i=1

ARit (3)

where Nt is the number of securities in a given

subsample. A statistical test (t-test) is then used to

determine the level of significance of abnormal

returns for a given subsample. The test uses the

estimated standard error of the returns computed

for the estimation period:

t=AARt/sˆ(AARt) (4)

where sˆ(AARt) is the estimated standard error of

abnormal returns during the estimation period. A

number of alternative models can be used to test

the robustness of the results (e.g. the single-index

market model or the market adjusted returns

model). Henderson (1990) points out that these

alternative tests yield results of a similar nature as

those obtained by using the CAPM. Note finally

that abnormal returns are typically calculated on

the day of announcement and the subsequent one

to three days. Confounding events prevent the

calculation of abnormal returns beyond this

window.

4. Empirical analyses

Following these lines of argument, a number of

papers have investigated, using the event-study

methodology, how capital markets can provide

incentives for pollution control. Muoghalu et al.

(1990) examine the impact of environmental enforcement measures related to the American

RCRA (Resource Conservation and Recovery

Act) and the Superfund Acts on firms’ financial

value. Their sample consists of 128 initial lawsuits

against firms and 74 case settlements (involving a

fine) announced in the print media (generally the

Wall Street Journal) between 1977 and 1986. The

event-study results indicate that stockholders suffer on average a statistically significant loss of

g

million in equity value. Given the small penalties

typically imposed by courts and regulators, this

result confirms our hypothesis that losses of market value, if any, are likely to be significantly

larger than the traditional penalties.

Lanoie and Laplante (1994) perform a similar

analysis with nine announcements of lawsuits and

13 announcements of suit settlements in Canada

during the period 1982-1991. Interestingly, they

find results that contrast with those of Muoghalu

et al., 1990; i.e. they observe abnormal losses

between 1.65 and 2% when the firm is found

guilty (and fines are imposed), but no losses when

lawsuits are initiated. This difference may be due

to the conciliating approach that Canadian environmental authorities have traditionally adopted

in comparison with their American counterparts

(Marchant, 1990). As pointed out earlier, it is also

interesting to note that the recovery of economic

benefits realised as a result of non-compliance is

not a common practice in Canada while it is

explicitly incorporated in the assessment of

penalties in the United States. The fact that Canadian shareholders do not react to the announcement of lawsuits may indicate little or no worry as

to the outcome of the legal procedure, while

American environmental authorities seem to have

been more successful in designing enforcement

mechanisms in which a lawsuit can impose a

credible threat on investors.

While negative information may adversely impact the market value of a firm, Klassen and

McLaughlin (1996) also find that environmental

awards, denoting public recognition of strong environmental performance, had a positive impact

on market valuation. Based on a sample of 140

events (announcement of an environmental

award) collected over the period 1985-1991 in the

United States, these authors found that market

valuation increases on average by 0.82% upon

announcement of the award; this translates into

an average increase of over US$80 million. They

also find, based on a sample of 22 events collected
oote s voved. ote tat te o

mation used in these three studies would classify

as indi6idual information.

In contrast with the preceding research, two

studies have analysed the deliberate provision of

information to the markets (by regulators or third

parties), and its impact on firms’ value. This

information is based on rankings of polluters and

can thus be qualified as comparati6e information.

Shane and Spicer (1983) use studies conducted by

the council of economic priorities (CEP) of firms’

environmental performance in four industries (paper, power, steel, and oil) to analyse the reaction

of investors to the release of the results of those

studies. They examine eight studies released by

the CEP between 1970 and 1975. They find that

firms’ market value is adversely affected by the

release of this information. Perhaps more interestingly, they also find that firms identified as serious

polluters suffered greater loss of market value

than those with a better ranking. Given these

results, these authors conclude that investors use

the information to discriminate between companies on the basis of their environmental performance records.

Hamilton (1995) examine how financial markets

have reacted to the first edition of the ‘toxic

release inventory’ (TRI) in June 1989. The TRI

reports information on manufacturing facilities,

with 10 or more employees, that produce or use

above a threshold amount of chemicals on a list

of over 300 toxic chemical substances identified by

EPA. For each chemical, the facility submits a

form listing releases to the environment broken

down by emission pathways: air, land, underground injection, etc. Furthermore, the TRI data

contains information on facility name and parent

ownership so that media coverage can link operating facilities with their parent company. Firms are

ranked from large to small polluters on the basis

of their absolute levels of emissions, thus, allowing a direct comparison of their environmental

performance.

g (, pp, py

metals, petroleum and textiles) with 12% in the

chemical industry. Results show that these firms

experienced negative, statistically significant abnormal returns between 0.2 and 0.3% upon the

first release of the information. These abnormal

returns translated into an average loss per firm of

$4.1 million in stock value on the day the pollution figures were released, with firms in the primary metals industry experiencing a smaller loss

of market value (presumably because these firms

were already perceived as large polluters by the

market). He also found that the larger the number

of chemicals a firm reported to produce or handle

at its facilities, the larger the loss the firm suffered

in its market value: for each additional chemical,

Hamilton measures a loss of $236000.

Perhaps more interestingly, Konar and Cohen

(1997) recently found that firms with the largest

decline in stock value on the day the information

contained in the TRI was made public, subsequently reduced their emissions more than other

firms in the same industrial sector of activities.

These results partly support a former EPA director’s claim that ‘(...) the Toxics Release Inventory

is fast becoming one of the most powerful tools

we have to reduce toxic emissions’. (New York

Times, October 13, 1991). On the basis of this

later result, it would therefore appear that financial markets may provide firms with incentives to

improve their environmental performance. Referring to the TRI, J.S. Naimon of the Investor

Responsibility Research Center is quoted as saying: ‘(...) companies that emit a lot of toxic waste

do not have good financial indications in the long

term’ (New York Times, October 13, 1991).

4.1. New results

Since July 1990, every six months or so the

Ministry of the Environment of British Columbia

(BC, Canada) publishes a list of polluters identified into two categories: (1) firms that are currently not complying with an environmental
Alcan Aluminium Ltd. c,pp c,ppp c,p c,p a c,p

B.C. Sugar Refinery Ltd. p c,p p c,p c,p

Canadian Pacific Forest Products Ltd. c c,p c c,p c

Canadian Pacific Ltd. — — — — p

Canfor Corp. — c — ccc ccc

Cominco Ltd. c,ppp ccc,ppp c,pp cc,pppp c,ppp

Equity Silver Mines Ltd. p — — p —

Flectcher Challenge Canada Ltd. ccc c cc c c

George Weston Ltd. c — c c —

Imperial Oil Ltd. (Esso Petroleum Canada) — c c c,p cc

International Corona Corp. c ccc—

MacMillan Bloedel Ltd. c,ppp cccc c,ppp ccc cccc,p

Methanex Corp. — c — — —

Noranda Inc. p p p p p

Placer Dome c — p c c

Repap Entreprises Inc. c c c c —

Shell Canada Ltd. — c — cc,pp —

Westar Group c,pp — — — —

Westmin Resources Ltd. p p c —p

a

The number of letters indicate the number of times that the enterprise appeared on the list.

p: plants not complying with pollution standards; c: plants of concern to the Ministry.

standard or permit; and (2) firms that are of

concern to the Ministry because their environmental performance is near the regulatory threshold,

or because their level of pollution is abnormally

high in a sector of activity which is not regulated.

Since these lists do not provide a ranking of

enterprises, and do not allow for a comparison of

their environmental performance, we classify this

information as indi6idual information.

In the following, we examine the impact of the

first five lists of polluters on the equity value of

firms appearing on these lists. Our analysis complements that of Hamilton (1995) in two different

ways: (1) it is based on a Canadian list providing

a different set of informations than those released

in the TRI; and (2) we investigate how investors

treat the information about firms appearing successively on more than one list, while Hamilton

focused exclusively on the first release of the TRI.

Table 1 presents a list of 19 firms quoted on the

stock market and appearing on any of these first

five lists. This table shows whether a firm has been

identified as ‘out of compliance’ or as ‘of concern’. Furthermore, it indicates that multi-plants

firms may appear more than once on the same list

if many of their plants are either non-complying

or of concern.

We use the SIMM (single-index market model)

version of the standard event-study technique to

analyze investors’ reaction to the publication of

the lists. A three days event window (day −1,

day 0 and day +1) is considered, where day 0

refers to the publication date of the list. Certain

companies were discarded in the analysis because

of confounding events such as an announcement

of dividend pay-off, profits, merger, take-over or

new share emissions. We first look at the whole

sample of firms appearing on each list. Then, we

examine more specifically the firms that are of

concern versus those that are out of compliance,

and the firms that have appeared once on a given

list versus those that have appeared several times.

Finally, to investigate how investors react to successive appearances on different lists, we perform
pp

list. There is no statistically abnormal loss on any

day of the event window for any of the list.

Contrary to what was observed by Hamilton

(1995) and Shane and Spicer (1983), this suggests

that appearing on the BC polluters’ list has no

impact on a firm’s equity value.

A number of reasons may explain this result.

First, it may be that BC’s lists of polluters do not

provide new or unexpected information to investors. Canada is a much smaller market than

the United States, with only a very few large

public enterprises. The first release of the TRI

provided a set of detailed information on releases

of a large number of severe pollutants, information more likely to be unknown to the investors

than that provided by the BC list. Moreover, it is

important to note that in any given list, the

Ministry of the Environment does not systematically report all firms out of compliance or of

concern to the Ministry. A firm may be out of

compliance (or of concern) and yet never appear

on the lists, or appear only after a number of lists

have been published: not being listed is not necessarily an indication of good environmental performance. As we have noted before, this feature of

the BC’s lists of polluters does not allow investors

y py () 

economy, whose main market consists of the

manufacturing sector; therefore, any potential decline in demand resulting from an adversarial

reputation effect may be less important than in

Hamilton’s sample which covered firms in a

broader set of activities. Finally, investors may

believe that appearing on BC’s lists does not

represent any significant threat for the companies

involved. Given our earlier discussion, the difference between the American results and those presented here may again indicate that American

environmental authorities have been more successful in designing policy mechanisms that create

a credible threat for firms.

Tables 3 and 4 provide a more detailed analysis

in which different categories of firms are distinguished. In Table 3, firms that are out of compliance and those that are of concern are analyzed

separately. One could expect that firms out of

compliance would be under a more important

threat than those of concern. On the other hand,

the fact that firms are of concern for the environmental authorities could be new information to

the market; this could have more impact on the

value of firms reported under this heading. As

shown in Table 3, however, no statistically significant abnormal losses can be detected in either

category.

In Table 4, we distinguish between firms that

appear once on a given list and those that appear

more than once. One would expect that for environmental authorities, the pressure to take actions

against a polluter may be ‘cumulative’ so that

firms appearing more than once on a given list

could experience more important abnormal losses.

The results seem to confirm this hypothesis. Indeed, we obtain statistically abnormal losses on

day −1 and day +1 for firms appearing more

than once on the second list: −0.1 % on day −1

and −1% on day +1. Such abnormal negative

returns for firms appearing several times on the

second list may indicate that investors required

strong signals about a firm’s bad environmental

Table 2

Whole sample results

List Day Day −1 Size of Day 0 +1

sample

t. stat t. stat t. stat

L1 0.0026 13 0.0017 0.003

(0.543) (0.9199) (0.8381)

L2 0.0037 12 0.0029 −0.005

(0.7146) (0.5623) (−0.9373)

L3 −0.006 0.0033 −0.009 7

(−0.7932) (0.5623) (−1.27)

L4 0.0006 7 −0.007 −0.004

(−0.8972) (−0.5353) (0.0084)

L5 10 0.0018 0.0042 −0.01

(0.2756) (0.6684) (−1.527)
y y y py y y p

t. stat t. stat t. stat t. stat t. stat t. stat

L1 −0.002 0.01486** 0 4 0.0179* 0.0064 0.0097 3

(−0.2694) (0.6777) (1.033) (2.123) (0.05831) (1.92)

L2 0.0079 −0.004 0.0039 4 0.01014 0.01277 −0.003 4

(1.028) (−0.5575) (0.5074) (1.11) (1.399) (−0.3323)

L3 −0.002 0.0026 −0.0125 0 4 −0.0136 −0.0308 1

(−0.1111) (0.0538) ( (−0.6513) (−0.0341) (−0.2761) −0.656)

L4 0.01149 −0.007 −0.009 2 0.0015 −0.004 0.0056 1

(0.7123) (−0.4538) (−0.532) (0.1043) (−0.2595) (0.3896)

L5 −0.002 0.0013 −0.007 4 −0.003 0.0013 −0.0144 3

(−0.265) (0.1351) ( (0.1528) (−0.8416) (−0.2965) −1.485)

* Statistically significant at the 90% level.

** Statistically significant at the 95% level.

performance before revising the expected value

attributed to this firm.

Table 5 provides further evidence that investors

may have reacted in the way we just described. In

this Table, we consider a sample of firms that

have appeared on every list so as to investigate

how investors handle the information contained

in successive appearances on the list. There were

two such firms. Again, the only significant abnormal loss appears for the second list on day +1 (a

loss of 2%), suggesting that investors needed

strong indications before changing their expectations. No abnormal losses beyond the second list

may mean that appearing on the list has a oncefor-all effect, and that successive appearance does

not provide significant new information.

5. Concluding remarks

It has been observed that upon trading-off the

costs and benefits of pollution control, profitmaximizing firms may choose not to invest their

resources in pollution abatement since the expected penalty imposed by regulators falls considerably short of the investment cost. This however

ignores that markets and communities can also

create incentives for pollution control to the extent that they possess information regarding a

polluter’s environmental performance. Regulators

have recently embarked on a deliberate strategy to

release information to markets (investors and consumers) and communities regarding firms’ environmental performance in order to enhance

incentives for pollution control. It shall be

pointed out that it may require considerable political backbone to pursue this strategy. Indeed, for

such a strategy to be effective, the information

used and revealed by the regulator has to be

accurate. Moreover, the regulator may be under

pressure from the regulated community not to

reveal such information. Finally, by revealing the

environmental performance of firms, the regulator

makes itself more transparent, and simultaneously

reveals its own ability (or inability) to bend polluters toward pollution abatement.

In this paper, we analyze the role that capital

markets may play to create such incentives. Evidence drawn from American and Canadian studies indicates that capital markets react to the

release of information, and that large polluters are

affected more significantly from such release than

smaller polluters. Hence, regulatory agencies can

use, in addition to traditional regulatory mea-
y y y y y py p

t. stat t. stat t. stat t. stat t. stat t. stat

L1 0.0048 0.011096* 0.00406 7 0.00381 0 −0.0022 6

(0.7902) (1.814) (0.6622) (0.5021) (−0.051) (−0.2851)

L2 0.0086 0 0.00263 0.0009 7 −0.0011* −0.01091* 5

(1.333) (0.4052) (0.1426) (−1.677) (−0.007) (−1.712)

L3 −0.003 −0.01159 −0.0035 4 −0.0067 0.006 −0.01012 3

(−0.1426) (0.7953) ( (−1.6174) (−0.1885) (−0.8977) −1.347)

L4 0.0059 −0.0053 −0.001 2 −0.01183 −0.004 0.0009 5

(0.5241) (−0.4748) (−0.05241) (−1.38) (−0.4156) (0.1042)

L5 −0.003 0.0091 0.0017 −0.01026 7 0.015537 −0.0039 2

(−0.4383) ( (0.2495) −1.504) (1.501) (0.8876) (−0.3767)

* Statistically significant at the 90% level.

** Statistically significant at the 95% level.

sures, information-oriented approaches so as to

harness the power of communities and markets

to put pressure on polluters. This result however

appears to be a function of the regulator’s willingness to undertake strong enforcement actions

(United States vs. Canada), as well as the possibility for capital markets to rank and compare

firms with respect to their environmental performance (Council of Economic Priorities and TRI

vs. British Columbia’s lists of polluters).

Further research in this area will indicate the

circumstances under which the release of information can create incentives for pollution control by empowering the agents that can bear

pressure on polluters. In particular, current research will indicate whether or not capital markets in de6eloping countries can create incentives

for pollution control. Further research should

also indicate whether or not this information not

only has an impact on market valuation, but

ultimately whether or not it affects a polluter’s

environmental performance.

Acknowledgements

We are grateful to Jean-Francois L’Her, JeanMarc Suret and David Wheeler, and anonymous

referees for their comments. Financial assistance

was provided by the Fonds FCAR. Usual disclaimers apply.

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Table 5

Enterprises appearing on the first five lists

List Day 0 Day Day −1 +1

t. stat t. stat t. stat

L1 0.002476 0.011362 0.004622

(0.4706) (0.2519) (1.149)

L2 −0.00592 0.008302 −0.020457**

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L3 0.009997 −0.010403 −0.014264

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