Capital markets responses to environmental performance in developing countries

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Capital markets responses to environmental performance in developing countries, Volume 1

Author:	Dasgupta, Susmita; Laplante, Benoit; Mamingi, Nlandu;	Collection Title:	Policy, Research working paper ; no. WPS 1909
Country:	Switzerland; Mexico; Philippines; Argentina;	Date Stored:	1998/04/01
Document Date:	1998/04/30	Document Type:	Policy Research Working Paper
Language:	English	Major Sector:	Finance
Region:	Europe and Central Asia; East Asia and Pacific; Latin America & Caribbean	Report Number:	WPS1909
Sub Sectors:	Capital Markets Development	SubTopics:	Environmental Economics & Policies; Small Scale Enterprise; Water and Industry; Agricultural Research; Microfinance; Small and Medium Size Enterprises; Private Participation in Infrastructure
Volume No:	1

Summary: Firms in developing countries are often said to have no incentives to invest in pollution control because they typically face weak monitoring and enforcement of environmental regulations. But the inability of formal institutions to control pollution through fines and penalties may not be as serious an impediment to pollution control as is generally argued, contend the authors. Capital markets may react negatively to news of adverse environmental incidents (such as spills or violations of permits) as well as positively to the announcement that a firm is using cleaner technologies. The authors assess whether capital markets in Argentina, Chile, Mexico, and the Philippines react to the announcement of firm-specific environmental news. They show that: I) Capital markets react positively ( the firms' market value increases) to the announcement of rewards and explicit recognition of superior environmental performance. ii) They react negatively (the firms' value decreases) to citizens' complaints. Environmental regulators in developing countries could 1) harness market forces by introducing structured programs to release firm-specific information about environmental performance, and 2) empower communities and stakeholders through environmental education programs.


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