Do Stock Markets Penalise Environment-Unfriendly Behaviour? Evidence from India

A growing body of research points to the fact that capital markets react to environmental news and thus create incentives for pollution control in both developed and emerging market economies. In this paper we conduct an event study to examine the impact of environmental rating of large pulp and paper, auto and chlor alkali firms on their stock prices. We find that the market generally penalizes environmentally un-friendly behaviour in that announcement of weak environmental performance by firms leads to negative abnormal returns of up to 43 percent. A positive correlation is found between abnormal returns to a firm’s stock and the level of its environmental performance. These findings should be viewed as further evidence of the important role that capital markets could play in environmental management, particularly in developing countries where environmental monitoring and enforcement are weak. JEL Classification: Q25, G14, L73