Al-Najjar, Anfimiadou - Environmental Policies and Firm Value - Business Strategy and the...

Business Strategy and the EnvironmentBus. Strat. Env. 21, 49–59 (2012)Published online 27 April 2011 in Wiley Online Library(wileyonlinelibrary.com) DOI: 10.1002/bse.713

Environmental Policies and Firm Value

Basil Al‐Najjar* and Aspioni AnfimiadouMiddlesex University Business School, Middlesex University, London NW4 4BT, UK

*Corres

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ABSTRACTMany organizations are currently becoming more environmentally friendly. Eco‐efficiencymaximizes the effectiveness of a business operation while reducing its impact on theenvironment; with the necessary skills, organizations can create more value while using lessinput. Prior empirical studies have suggested that firms engaging in eco‐efficient activities arebetter valued than those without such activities. Therefore, this will enhance business efficiencyand excellence. This study investigates the link between eco‐efficiency, as environmental policy,and firm value in the United Kingdom (UK) for the period 1999 to 2008. We generate newinsights into environmental–financial performance by using different definitions of the term‘eco‐efficiency’. In theUK context our results support that eco‐efficient firms have highermarketvalues than those lacking environmental strategies. Hence, we recommend that firms becomeinvolved in environmental polices since the adoption of these policeswill have a positive impacton firm value. Copyright © 2011 John Wiley & Sons, Ltd and ERP Environment.

Received 6 February 2011; revised 10 March 2011; accepted 17 March 2011

Keywords: eco‐efficiency; market value; ISO14001; UK

Introduction

LIMATE CHANGE HAS ATTRACTED CONSIDERABLE ATTENTION AND DEBATE IN RECENT YEARS, LEADING MANY INDUSTRIES

and organizations to adopt ‘green’ attitudes. Nowadays, businesses focus on how to enhance their
Cenvironmental frameworks to improve their business processes. Therefore, eco‐efficiency, the mainpremise of this empirical study, is used to assess the relationship between environmental polices and firm
value in the UK.The link between environmental activities and good economic performance is not new (see, for example,

Belkaoui, 1976; Anderson and Frankle, 1980). In contrast, others detect that there is no such positive relationship.Thus, Freedman and Jaggi (1982), Ingram and Frazier (1980) and Walley and Whitehead (1994) argue thatenvironmental actions are costly as extensive research technologies are involved in developing green processes orproducts to reduce harmful impacts on the environment and adhere to eco‐efficiency standards.

Consumers increasingly favor environmentally friendly firms, and therefore more firms are taking theopportunity to maximize their profit while reducing costs by investing in eco‐friendly projects. Eco‐efficiency (EE)serves as a management control mechanism to reduce a firm’s impact on the environment and simultaneouslycreate more value for shareholders (Markus, 2000; Sinkin et al., 2008). The economic literature identifies this as‘the ratio of economic value added to environmental damage added’ (Figge and Hahn, 2004).

The concept of EE has been discussed by the World Business Council for Sustainable Development (WBCSD),where EE can be achieved by ‘the delivery of comparatively priced goods and services that satisfy human needs and

pondence to: Basil Al‐Najjar, Accounting and Finance, Middlesex University, London NW4 4BT, UK. E‐mail: b.al‐[email protected]

t © 2011 John Wiley & Sons, Ltd and ERP Environment

50 B. Al‐Najjar and A. Anfimiadou

bring quality of life, while progressively reducing ecological impacts and resource intensity throughout the lifecycle, to a level at least in line with the earth’s estimated carrying capacity’ (World Business Council for SustainableDevelopment Report, 2002, p. 5). From the WBCSD, it can be noted that EE includes features which direct firmstowards higher efficiency levels. These characteristics comprise: reduction of toxic materials; increased recycling ofwaste; and use of renewable materials. In such circumstances, firms are urged to adopt these eco‐efficient practicesas they can benefit from both internal and external advantages. At the firm level, businesses are able to benefit fromfalling costs of materials and higher‐quality products. Externally, those eco‐efficient firms benefit from governmentregulations on the environment, the existence of competition and better access to capital. All these benefits arederived by firms with plans to protect the environment (see Côté et al., 2006). Sinkin et al. (2008) assess EE as aframework where firms increase their value by increasing the effectiveness of business processes andsimultaneously reducing harmful environmental effects. It is worth noting that the definition of EE varies amongstudies. For instance, in the Finnish study of Erkko et al. (2005), EE is expressed as the ratio of economic value offirms to their environmental impact. A similar definition is adopted by Helminen (2000). As a result, EE refers toseveral aspects favoring an environment framework (which includes the reduction of pollution or emission andrecycling of waste). Nevertheless, all these definitions have the same objective of enhancing the protection of theenvironment. Thereby, firms adopting these environmental strategies can increase the structure of environmentalmanagement and become eco‐efficient, and consequently increase business efficiency.

Our empirical analysis appears to be the first in the United Kingdom (UK). It extends the work of Sinkin et al.(2008) and examines whether UK eco‐efficient firms are highly valued in comparison with non‐eco‐efficient firms,using different ways to define EE from 1999 to 2008. First, we test EE as reflected by ISO 14001, an externalenvironmental certification. Firms must also have had corporate social responsibility (CSR) or sustainabilityreporting for five or more years. In order to observe the power of the above definition, EE is also indexed byparticipation in two indices for a minimum of 5 years: the Business in the Environment (BiE) and FTSE4Goodindices. By evaluating firm value in terms of EE performance, evidence is provided on the potential of value creationthrough environmental investments.

Our main conclusion is that eco‐efficient companies have higher market prices in comparison with non‐eco‐efficient firms; this does not change substantially across the EE definitions used.

The remainder of the paper is organized as follows: the next section highlights the environmental context in theUK, then there is a literature review; after that we describe the data and outline our methodology and then discussthe results. Our conclusions are in the final section.

The Environmental Context in the UK

The Corporate Responsibility Exchange (CRE) requires listed companies to be active in CSR, while the FTSE4Goodindex has a ranking for environmentally friendly and socially aware organizations. Operating and Financial Review(OFR) has also been in effect since 2005 and requires all listed firms to notify the public of their means of dealingwith different environmental and social concerns (Idowu and Papasolomou, 2007). Over 80% of UK FTSE 100organizations voluntarily publish CSR reports, although this remains voluntary and there is no specific format forreporting activities. No external body audits CSR reports and hence investors may doubt their reliability.

The Kyoto Protocol is an international environmental law first introduced by the United Nations in 1992. The treatywas reinforced in February 2005 with a major objective and a significant target for tackling climate change by reducinggreenhouse gas emissions to a certain level for each industry and country (Dessai et al., 2003). The protocol has beencriticized ever since it became law. US economists criticize the fact that the aim of the protocol is to achieve a certaintarget limitation, arguing that it should concentratemore on reducing emission levels. However, environmentalists andscientists claim that the commitments are ‘too flexible’ and stronger rules should be imposed (Grubb, 2002).

The UK has adopted the Kyoto Protocol. In 1999 the British Government introduced an incentive of an 80%discount from the Climate Change Levy in exchange for reducing carbon emission and energy use through climatechange agreements (CCAs). The government has also passed legislation that allows the imposition of financialpenalties on corporations not following certain environmental schemes (McGinness, 2001). In addition, Ekins and

Copyright © 2011 John Wiley & Sons, Ltd and ERP Environment Bus. Strat. Env. 21, 49–59 (2012)DOI: 10.1002/bse

51Environmental Policies and Firm Value

Etheridge (2006) argue that there are opportunities to save funds in ‘energy efficiency processes’. The first periodof agreed action for the UK to reduce 85.7% of 1990 levels of gas emissions.

The annual report is seen as a main ‘communication medium’ and source for researchers to investigateenvironmental disclosures (Gray et al., 2001). The study adopts environmental reporting in the CSR report as onecriterion when defining EE. McWilliams and Siegel (1999) argue that the major reason for adopting and publishingCSR is to satisfy firms’ shareholders.

The above discussion shows the importance of environmental actions for UK firms, and hence we are employingdifferent definitions for EE to address the different procedures UK firms use to show concern toward theenvironment (for more details see Empirical Analysis).

Literature Review

EE was first defined in 1991 as a mechanism for creating more value by using fewer resources (Markus, 2000). TheWBCSD describes it as a ‘management philosophy’ that aims to increase profit while also reducing the impact onthe environment. It considers new managerial strategies and movements which can generate businessopportunities and competitive advantage for firms (Porter, 1991).

Different studies, theoretical and empirical, discuss and analyze the relationship between environmentalactivities and financial performance, in contrast with the relatively limited number of EE analyses and studies.Sinkin et al. (2008) suggest that eco‐efficient firms are valued more highly by the market and their firm value isactually higher than that of non eco‐efficient firms.

There is no available conclusive result regarding the relationship between environmental activities and financialperformance, as multiple factors have rendered previous research of limited use. These include: small sample size,no specific definition of becoming ‘greener’ and a lack of sound theoretical foundations (Wagner, 2001).Conflicting results stress the complex nature of the relationship between environmental polices (performance) andfirm performance (Corbett and Klassen, 2006).

Different types of studies evaluate the relationship between environmental changes and stock market behavior.The first method for such investigation has been the event study, which aims to establish the best link betweenenvironmental and short‐run stock market performance. The second type of analysis is regression methodology,which is considered to explain the abovementioned long‐term relations based on accounting indices.

The first scheme of research in this area includes Shane and Spicer (1983), who report that the disclosure ofexternal information such as the minimization of pollution affects investors’ view of firms’ expected costs and thepotential regulation that could be applied to particular firms. Freedman and Jaggi (1982) investigate therelationship between pollution disclosure and financial performance, which shows no significant correlation. Sucha verdict is based upon a 1‐year period (1973–74) testing 109 firms. Moreover, Blacconiere and Patten (1994)examine the market reaction of 47 chemical firms to the Union Carbide leak event in India in 1984. They argue thatthe catastrophe had a major negative impact on chemical firms while the impact on those firms that producedenvironmental reports prior to the leak was less. Similarly, Blacconiere and Northcut (1997), investigating theperiod 1985–86, studied 72 chemical firms and conclude that ‘extensive environmental reports’ are indeedperceived as a positive sign by investors. Klassen and McLaughlin (1996) investigate the environmentalmanagement effect and establish that there is a positive return for ‘good environmental management’ and anegative return for ‘pathetic environmental management’. Jacobs et al. (2008) argue that the market is selective inresponding to ‘environmental performance’ declarations. They state that the market does not react toannouncements of corporate environmental initiatives, nor to environmental awards and certification by thirdparties. However, it seems that the market responds significantly to certain types of announcements, such aspositively to ISO 14001 certification and negatively to voluntary emissions reductions.

The second type of papers investigate the relationship between CSR and stock returns, adopting regressionanalysis. Some empirical studies consider CSR as either a dependent or independent variable and report a positiverelationship between the two (Anderson and Frankle, 1980; Belkaoui, 1976; Bowman, 1978; Fry and Hock, 1976;Preston, 1978; Scholtens, 2008). On the other hand, others suggest a negative association (Freedman and Jaggi,



1982; Ingram and Frazier, 1980). Ullmann (1985) argues that the main reason behind these contradictions is thedifferent methods of measurement of social disclosure variables.

Johnson (1996), using many measures based on the US Toxic Release Inventory (TRI), states that specific typesof environmental performance in a particular industry sector are positively associated with better financialperformance. He uses accounting measures such as return on assets and return on equity to support his statement.The following year, by using the same index as Johnson (1996), Cordeiro and Sarkis (1997), additionally test therelationship between environmental and economic performance. However, they use ‘one‐year earnings per shareand five‐year earnings per share growth forecast’. Their study has several limitations such as the definition ofenvironmental performance measures (Wagner, 2001).

Thomas and Tonks (1991) test the relationship between stock returns and environmental actions. Using asample of UK firms, they find that environmental policies adopted by firms linked with strong pollution actuallyimproves their stock returns. However, during the period 1995–97 the excess return was reduced.

Other findings indicate that firm size has a positive effect on the possibility of environmental measures (see, forexample, Welch et al., 2002). Guenster et al. (2006) detect that eco‐efficiency is positively related to market value.They also report that eco‐efficient firms underperform in comparison with non‐eco‐efficient firms. Certainly theydisagree with CSR academics that the benefits associated with environmental policies are higher than the costs. Thesecond major point is the ‘positive and time varying relation between eco efficiency and firm valuation as measuredby Tobin’s Q’ (Guenster et al., 2006:4 part 6). This suggests that the share prices of eco‐efficient firms areundervalued at the beginning of such implementation but afterwards price correction is attained. Sinkin et al.(2008) argue that firms which follow eco‐efficient strategies have lower costs involved while their profit is increasedand they are valued highly by the market. They define eco‐efficient firms as those that have external certification andauditing (ISO 14001) and Corporate Reporting (CR). From their sample of firms (2003, Fortune 500) only 95 wereeco‐efficient. They report that eco‐efficient firms have ‘positive market value’ compared with non‐eco‐efficientfirms. Pogutz and Russo (2009) provide evidence that firms that care about environmental issues have increasedmarket value as well as an improved financial performance in the short term.

Portfolio study is the third technique which analyses the benefits of CSR for future investment decisions (formore discussion, see Wagner, 2001; Guenster et al., 2006; Jacobs et al., 2008).

From a business perspective, Dyllick and Hockerts (2002) argue that the use of eco‐efficient services is notnecessarily the only way to enhance sustainability. They discuss that firms should rather stress an appropriateamount of CO2 emissions. Other studies argue that the adoption of EE does not necessarily protect theenvironment for businesses on a long‐term basis. Young and Tilley (2006) point out that firms should align theirbusiness processes with EE. In so doing, they will be able to enhance business performance and excellence as wellas considering environmental implications. Therefore, they suggest that the concept of eco‐effectiveness requiresthat firms should develop new systems and processes in carrying out business operations and methods to recyclewaste. Additionally, the development of such processes requires upfront capital, but with the current economiccrisis firms might be reluctant to invest in EE investments to reduce harmful environmental activities. Priorempirical evidence of an effect of the environment on firms’ strategies has been investigated, in which potentialbenefits can be found when adopting the concept of environmental sustainability. For instance, Weber et al. (2010)investigate the evidence between environmental sustainability and credit rating by using a questionnaire approachto around 40 German banks. After obtaining information about 58 criteria of sustainability, they conduct a two‐stepanalysis in which they observed that sustainability is able to predict the credit viability of debtors and therebyenhance the predictive process. Hence, it can be argued that the inclusion of sustainability in predicting creditrating improves the risk management process of firms. In so doing, firms’ performances will be increased. Albinoet al. (2009) adopt content analysis of a sample of companies from the Dow Jones Sustainability World Index. Theystress the importance of environmental sustainability by selecting appropriate business processes such as greenprocesses. Therefore, they examine whether firms engaged in the development of green products adopt strategiesbased on the environment as compared with non‐green firms. From their findings, they demonstrate that firmsengaged in green product development have a wider array of environmental strategies than non‐green productdevelopers. In addition, they found that economic sector and geographical location, or where firms are based, play asignificant role in environment strategies. They noted that the strategies varied by sector and location. Wahba(2008) apply regression analysis by associating institutional ownership and environmental responsibility. Wahba



argue that firms adhering to ISO 14001 standards positively influence institutional ownership of Egyptian firms.Therefore, it could be discussed that firms with good environmental responsibility serve as a signal for institutionalinvestors. It is frequently argued that environmental aspects can also influence agency theory. This dimension hasbeen examined by Berrone and Gomez‐Mejia (2009), who investigate the relationship between environmentalfeatures and CEO compensation in a US context. They observe a positive association between environmentalperformance and CEO pay, suggesting that such firms denote survival capabilities and therefore compensate CEOs.They further suggest that firms having an environment committee and environment pay framework positivelyinfluence CEO pay. Engaging in environmental activities, such as reducing pollution or gas emissions, are part ofmanagers’ responsibilities where product redesign or processes are required. In such a case, managers may divertresources to more concrete projects instead of investing in expensive environmental development. However, Russoand Harrison (2005) argue that managers may be disposed to adopt easy strategies and actions to mitigate harmfuleffects after seeing the importance of environmental effects. Hence, a way to motivate management is to focus onenvironmental sustainability; CEOs are rewarded as an incentive to work towards enhancing environmentalperformance by developing appropriate strategies and processes within firms’ strategic planning process.Consequently, this will result in higher business efficiency and excellence.

From the above discussion of the literature, there is limited evidence in the UK literature regarding EE andfirm value. This study aims to bridge the gap in the EE literature and provide further evidence about EE within theUK context.

Data and Methodology

Data

The sample is taken from the UK FTSE 350 index, which comprises the largest 350 companies listed on the LondonStock Exchange (LSE). We match the 350 companies that have the required financial data with the BiE index. Weexclude all investment trusts as they are excluded from the BiE index. This leaves us with 201 firms that haveprovided the required information for the EE variables. We use DataStream to collect the financial data.

Table 1 reports the descriptive statistics of the variables investigated in this paper. On average, UK firms have anearnings per share (EPS) of 0.30, indicating a low EPS which rises. Our variable of interest is EE which has a mean46.8%, indicating that around 47% of the firms in the sample are EE firms. This demonstrates that in the UK mostof firms do not adhere to the concept of EE. It can be seen that leverage has a mean of around 18%, showing lowdebt levels. This explains that UK firms have less reliance on debt financing. Additionally, low profitability levelsprevail, with the mean of 7.16 % for the firms in the sample.

Variable Obs. Mean SD Min. Max.

MP 2009 5.280297 5.475916 0.062 52.46EPS 2009 0.297533 0.651021 −6.401 8.686BV 2010 2.431406 3.56851 −2.15 55.401EE 2010 0.467662 0.499077 0 1LEV 2010 0.179984 0.162844 0 1.1338FIRMSIZE 2010 6.205719 0.828408 4.22 9.38ROA 1998 7.162573 9.134316 −108.96 69.85LOGRD 687 9.635448 1.988493 4.60517 14.78548

Table 1. Descriptive statisticsMP, market price; EPS, earnings per share; BV, book value; EE, eco‐efficiency dummy variable; LEV, total debt to total assets ratio;FIRMSIZE, natural logarithm of total assets; ROA, return on assets; LOGRD, natural logarithm of research and development expenses.



From the correlation matrix, we notice that there is not a high correlation between the variables, with theexception that EPS is significantly correlated with book value (BV). However, when we run the variance inflationfactor, the result indicates there is no multicollinearity between the two variables.

Some studies use environmental performance indicators (EPI) to measure the effect of a company on theenvironment. For example, they measure the use of natural resources or emissions (Figge andHahn, 2004). Most dataused in these studies are drawn from theUSToxic Release Inventory (TRI), a database that contains information on toxicchemical releases and waste management activities. For example, Hamilton (1995) adopted this direct environmentalindex to conduct his research. Other investigators use indirect proxies to measure firm impact. For example, KlassenandMcLaughlin (1996) applied external environmental awards to examine whether companies with an environmentalcertificate achieve a better financial result.

This paper uses different measures to define EE. The study exploits the international standardizationenvironmental certificate (ISO 14001) as the first indicator (Klassen and McLaughlin, 1996; Verfaillie and Bidwell,2000; Marshall and Brown, 2003; Holland, 2003; Sinkin et al., 2008). ISO 14001 is used as a tool to meet internaland external objectives such as assuring employees and stakeholders on environmental issues. It is important tomake clear that the paper includes all the firms that have at least one of their divisions or subsidiaries certified withISO 14001 in the UK between 1999 and 2008. In order to find which companies are certified, the QA Register, aUK database of quality‐assessed firms including more than 100 accreditation bodies, was used. This has the mostcomplete available data for more than 100,000 organizations certified for their quality and environmentalmanagement strategies. The register includes only companies that have been provided with certifications by theUnited Kingdom Accreditation Service (UKAS).

The remaining indices have different standards and measurements. As discussed above, CSR is vital to externalreporting of a firm’s strategy, plans and actions on the environment. It is considered as part of an eco‐efficientbusiness strategy by many analysts and researchers such as Holland (2003), Brady et al. (1999), Sinclair and Walton(2003) and Sinkin et al. (2008). CSR is used by organizations as one of the indices to report their steps. From theresearch into each ISO 14001 certified company, all of them were found to have published a CSR or sustainabilityreport for five or more years (website‐annual reports). Therefore, our first definition of EE is ISO 14001 and CSR,and we therefore test 63 eco‐efficient firms (Marshall and Brown, 2003; Holland, 2003; Sinkin et al., 2008).

We add two more indicators to further increase the sample. BiE and FTSE4Good are used as environmentalbenchmarks. BiE ranks companies according to their management and performance scores based on surveys andquestionnaires. There are 70 firms ranked in the BiE list, and 60 in the FTSE4Good directory for a minimum of5 years. Since its launch in 2001 FTSE4Good has had its own ranking of organizations’ corporate responsibility. Inaddition, BiE also has a CSR index, which runs from 2002 onwards. Nevertheless, our second definition of EE isthat companies must have featured in two indices for five or more years during 1999–2008. As some of thecompanies featured only in BiE or only in FTSE4Good, the sample is reduced to 31 firms. Our final definitioncombines the previous two definitions, i.e. firms that have ISO 14001 and a CSR report and/or participate in the BiEand FTSE4Good indices, leaving us with 94 eco‐efficient firms.

Methodology

In the measurement of financial performance, some studies use abnormal returns (Hamilton, 1995; Blacconiereand Northcut, 1997; Klassen and McLaughlin, 1996) or Tobin’s Q (Dowell et al., 2000; Konar and Cohen, 1997).Another group (King and Lenox, 2002) uses accounting measures such as return on assets (ROA) or return onequity (ROE) as well as Tobin’s Q.

This research, following Sinkin et al. (2008), uses BV, EPS, leverage, market price and research anddevelopment (R&D) variables (Guenster et al., 2006; Pogutz and Russo, 2009). We add firm size as the naturallog of a firm’s total assets, to control for any influence on environmental strategy and performance (Guensteret al., 2006; King and Lenox, 2002; Pogutz and Russo, 2009). Another variable added is return on assets (ROA),in order to measure financial performance for a particular time period (Hart and Ahuja, 1996; Pogutz andRusso, 2009).



The study follows the Ohlson (1995) and Sinkin et al. (2008) model to test the effect of EE on firm value. Weconduct the following regression:

Pit¼ α○þ aIBVitþ a2EPSitþ βI(EEit)þ β2(LEVit)þ β3(FIRMSIZEit)þ β4(ROAit)þ β5(R&Dit)þ ηit

where:

Pit = share/stock price of firm i at date t,α0 = constant variable,BVit = book value of equity per share at time t,EE = eco‐efficiency indicator,EPSit = earnings per share for period (t – 1, t).LEVit = total debt to total assets ratio,FIRMSIZE =firm size, measured by the natural logarithm of total assets,ROA = return on assets (net income to total assets ratio),R&D = research and development expenditures (natural logarithm of research and development expenditures).

We re‐estimate the models controlling for year effects to control for any economic factor across the years; all themodels use clustered error terms to consider the group effects of the panel data.

(1)

Empirical Analysis

We follow the Sinkin et al. (2008) approach by estimating Equation (1) without research and development and firmsize. Table 2 shows the results of our model, for our first definition of EE (ISO 14001 and CSR). There is a positiverelationship between EE and firm value, suggesting that UK firms that adopt eco‐efficient strategies have higher firmvalue than firms that do not adopt eco‐efficient strategies. After we control for the year dummies, the EE coefficientremains positive and significant. We also find support for a positive significant relationship between eco‐efficientfirms and firm value whenwe define EE as firms that participate in BiE and FTSE4Good indices, suggesting that firmsthat participate in such indices have higher values than those that do not. This result remains unchanged when wecontrol for the year dummies. In order to gainmore understanding of the relationship between EE and firm value, wecombined the two definitions into one. Here, EE is defined as firms with ISO 14001, which have CSR, and participatein BiE and FTSE4Good indices. We detect a positive significant relationship between EE and firm value, and in turnwe argue that firms with eco‐efficient strategies outperform their counterparts without such strategies.

These findings are consistent with Sinkin et al. (2008) who posit a positive relationship between EE and firm valuefor a sample of US firms. In engaging in eco‐efficient activities, firms are required to devise new business strategies toadhere to an eco‐efficient environment. In so doing, such firms are in a position to operate within environmental

EPS BV EE LEV FIRMSIZE ROA LOGRD

EPS 1BV 0.6239 1EE 0.1136 0.0953 1LEV –0.1061 0.0156 0.1711 1FIRMSIZE 0.327 0.4287 0.517 0.2462 1ROA 0.433 0.0231 –0.0484 –0.1807 –0.1248 1LOGRD 0.0914 0.0762 0.2392 –0.1413 0.4851 –0.0569 1

Table 2. Correlation matrixVariables are defined in Table 1.



norms which will have consequent benefits in enhancing firm value. Among the control variables, we can deduce thatthe coefficient of EPS is positive and significant for all the sample firms (EE1, EE2 and EE3). This shows that high EPShas a a positive influence on firm value for UK firms. Similarly, we denote that high‐growth firms are likely to enhanceeco‐efficient firms. However, concerning leverage, we find no evidence that it influences the value of firms.

Table 3 shows the results of our model in Equation (1). The results are similar to those reported in Table 4. Theone exception is the EE coefficient: when it is defined as firms that participate in BiE and FTSE4Good indices it is

EE1 EE2 EE3

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Coeff. SE Coeff. SE Coeff. SE Coeff. SE Coeff. SE Coeff. SE

CONS 2.555*** 0.606 2.551*** 0.403 2.694*** 0.552 2.665*** 0.346 2.243*** 0.558 2.235*** 0.356EPS 2.925*** 0.607 3.177*** 0.609 2.961*** 0.607 3.211*** 0.609 2.883*** 0.586 3.137*** 0.590BV 0.666*** 0.150 0.658*** 0.153 0.647*** 0.145 0.640*** 0.148 0.663*** 0.141 0.656*** 0.145EE 0.829* 0.464 0.817* 0.456 1.298* 0.729 1.281* 0.716 1.402*** 0.400 1.382*** 0.395LEV –0.474 0.996 –0.404 0.985 –0.598 1.013 –0.523 0.999 –0.800 0.965 –0.722 0.955YEAR Yes No Yes No Yes NoR2 0.511 0.497 0.513 0.499 0.522 0.508Numberof obs.

2008 2008 2008 2008 2008 2008

Table 3. Regression analysisVariables are defined in Table 1.EE1, firms that have ISO and Corporate Social Responsibility (CSR) reporting; EE2, firms that participate in Business in the Environment(BiE) and FTSE4Good indices; EE3, firms that have ISO and CSR reporting and/or participate in BiE and FTSE4Good indices.***, **, * Indicate significance at 1%, 5%, and 10%, respectively.

EE1 EE2 EE3

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Coeff. SE Coeff. SE Coeff. SE Coeff. SE Coeff. SE Coeff. SE

CONS –3.241 2.758 –2.337 2.579 –4.518 2.776 –3.553 2.661 –2.478 2.610 –1.566 2.469EPS 4.399** 1.945 4.546** 1.946 4.435** 1.971 4.576** 1.971 4.408** 1.956 4.558** 1.959BV 1.245*** 0.332 1.221*** 0.334 1.201*** 0.316 1.177*** 0.319 1.237*** 0.332 1.214*** 0.335EE 1.065* 0.637 1.068* 0.627 –0.567 1.185 –0.527 1.170 1.044** 0.496 1.070** 0.498LEV 0.928 1.411 0.834 1.390 1.042 1.484 0.942 1.462 0.932 1.430 0.840 1.408FIRMSIZE –0.673 0.389 –0.656* 0.387 –0.350 0.464 –0.338 0.462 –0.793 0.444 –0.783* 0.443ROA 0.012 0.025 0.017 0.027 0.012 0.025 0.017 0.027 0.010 0.025 0.015 0.026LOGRD 0.809*** 0.241 0.802*** 0.239 0.795*** 0.238 0.787*** 0.236 0.799*** 0.235 0.791*** 0.233YEAR Yes No Yes No Yes NoR2 0.637 0.626 0.631 0.620 0.635 0.625Numberof obs.

687.000 687.000 687.000 687.000 687.000 687.000

Table 4. Regression analysis – full modelVariables are defined in Table 1.EE1, firms that have ISO and Corporate Social Responsibility (CSR) reporting; EE2, firms that participate in Business in theEnvironment (BiE) and FTSE4Good indices; EE3, firms that have ISO and CSR reporting and/or participate in BiE and FTSE4Goodindices.***, **, * indicates significance at 1%, 5%, and 10%, respectively.

Copyright © 2011 John Wiley & Sons, Ltd and ERP Environment Bus. Strat. Env. 21, 49–59 (2012DOI: 10.1002/bse

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not significant, suggesting that there is no substantial difference between firm values if firms participate in theseindices or not. The results remain unchanged when we control for the year dummies. There is a limited negativerelationship between firm size and firm value. This could be explained by the fact that small firms might havehigher value than large ones, which can be related to relative risk. Also, we find evidence of a positive relationshipbetween research and development expenditure and firm value, suggesting that firms that spend more in R&D havemore value. Our result is consistent with Dowell et al. (2000), Ballou et al. (2003) who report that R&D intensity ispositively related to firm value. Sinkin et al. (2008), however, report a positive but insignificant relationship betweenR&D and firm value. Finally, there is no significant relationship between leverage and profitability on the one hand,and firm value on the other.

We re‐estimate the models in Table 2 using the robust regression and the results are not substantiallydifferent from those reported above. The EE coefficient remains positive and significant for all the models wetest.

Conclusion

Earlier researchers found a positive relationship between environmental and financial performance (Andersonand Frankle, 1980; Belkaoui, 1976, Guenster et al., 2006). However, only a few studies concentrate on the EEconcept that supports the creation of an actual value factor for a firm which is consistent with the reduction ofimpact on the environment (Sinkin et al., 2008). Burritt and Saka (2006) examine the Japanese market anddetect that the association between environmental management accounting and EE is ‘incomplete’ and furtheraction towards sustainability improvement is suggested. In a portfolio study conducted by Derwall et al. (2005),eco‐efficient firms attain greater portfolio returns in contrast with their non‐eco‐efficient counterparts. Inaddition, according to Guenster et al. (2006), eco‐efficient firms have higher market value relative to other firms.A similar conclusion is also reached by Sinkin et al. (2008), who investigate the US market with regard to EEand firm value.

This paper applies Ohlson’s (1995) model and adopts a modified version of the methodology of Sinkin et al.(2008). The main outcome indicates a strong positive relationship between the market price and the EE variable.Thus, market price is highly affected by the EE term. Furthermore, the study empirically examines whether EEcriteria can result in different outcomes by defining and separating EE into two samples. As a result, companiesthat have ISO 14001 certification and publish a CSR report show greater value than firms that participate in twoindices for a minimum of 5 years.

Our findings have implications for both managers and investors. The acceptance of the relationship betweenEE and firm value provides evidence to investors that eco‐efficient corporations can generate higher futurereturns. Moreover, internal managers may note that such an investment is not in conflict with a firm’s primaryfinancial aims but can be viewed as a competitive advantage (Porter and Van Der Linde, 1995). Further, ourresults support the argument of Meijkamp (1998) that the use of eco‐efficient services induces a positiveimpact on firms and as a result leads to reduced harmful effects on the environment. Moreover, such eco‐efficient services can also influence consumer behavior in a positive way by being ‘eco‐friendly’, and henceenhancing firms’ sales. Nowadays, business process management has become a core area among firms.Therefore, adopting ISO 14001 will be beneficial for firms to operate at a fast pace and with great effectiveness.Moreover, aligning environmental standards with a firm’s business process is one of the main businessstrategies of firms engaged in environmental strategies. In so doing, such firms are in a position to enhanceefficiency and effectiveness as their processes operate in line with changing environmental conditions. Asmentioned earlier, by optimizing their systems, businesses will save time, costs and reduce risk and thereforeincrease firm value.

A number of proposals and related plans and actions have been suggested to address the discrepancies anddifficulties involved in measurement of EE. This study can be seen as a first attempt to address the issue and leavesplenty of room for further examination and discussion. Future research is encouraged, concentrating on more specificEE measures.



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