Internalization of Social Costs and the Value of the Firm: A Descriptive Empirical Study
Loading...
Date
1982-12
Authors
Shane, Philip Barry
Journal Title
Journal ISSN
Volume Title
Publisher
University of Oregon
Abstract
Pressures building in the late l960 's and early 1970 's led to the enactment of legislation effectively constraining firms to internalize social costs of pollution. The questions addressed in this dissertation are whether: a) investors' responses to these constraints reflected new off-balance-sheet liabilities; and b) investors made significant use of subsequently disseminated information about the liabilities.
The capital asset pricing model was used to analyze the theoretical effect of the pressures. The analysis predicted a decline in the equity values of the firms, viewed as new off- balance- sheet debt equal to the present value of the social costs to be internalized. Also predicted was an increase in systematic risk . Subsequent information about the liability was characterized as potentially having a "disclosure" and/or a "regulatory" effect. Any regulatory effect would be identical in nature to the effect of the pressures leading to the earlier legislation.
An extended market model, controlling for autocorrelation and nonsynchronous trading, was used with daily data to observe price and risk changes. The main experimental group consisted of firms included in reports on the firms' "social (environmental) responsibility" published by the Council on Economic Priorities (CEP) . Four test periods were identified that contained events (social pressure events) hypothesized to have significantly increased the probability that firms would be effectively constrained.
Test results, showing associations of the social pressure events with increases in systematic risk and decreases in prices, were consistent with the hypothesis that significant off- balance- sheet liabilities • resulted from the pressures. Additional tests for associations of the release of the CEP reports with changes in the systematic risk of firms reported on were inconclusive. Results of tests performed for additional experimental groups of firms, not included in the CEP reports, provided limited support for there having been a regulatory effect of the reports.
Description
203 pages
Keywords
capital asset pricing theory, social costs, empirical study, pollution