Further Examination of the Market Valuation of Environmental Capital Expenditures by Pulp and Paper Companies

In this study I use the US pulp and paper industry to explore the equity market’s valuation of environmental capital expenditures. I replicate and extend a study by Clarkson, Li, and Richardson that bifurcates the industry into high and low polluting groups. As with their study, I find evidence indicating that the market values environmental capital expenditures by over-compliant firms while attaching no such value to the same expenditures by minimally compliant firms. I do not find that the market assesses unrecorded liabilities to firms that are minimally compliant. My extension also seeks to address two possible specification issues in the Clarkson, et. Al. approach.  The first, levels model they used is unbiased but inefficient.  Their model scaled by common shares outstanding attempts to rectify this inefficiency but may not be the optimal choice of scaling variable. My results suggest that a “Best Available Technology” approach to environmental regulation may carry additional incentives provided by the capital markets.