With the increase of environmental supervision in China, environmental protection investment has become an inevitable investment choice for polluting enterprises. However, whether environmental protection investment can bring value to the enterprise has always been a hot topic of debate. The paper takes the 2008-2016 China A-share heavy polluting industry listed companies as the research object, tests the correlation between environmental protection investment and market value. Using the Ohlson valuation model, it is found that environmental investment has a positive impact on the market value. Further, the paper examines two possible paths of environmental investment impact on market value, and the results show that environmental protection investment increases the earnings persistence, but has no significant impact on the cost of equity capital. Therefore, it is concluded that environmental protection investment is conducive to the increase of market value, and the mechanism of environmental protection investment affecting market value is to improve the sustainability of earnings.
The report of the 19th National Congress of the Communist Party of China proposed to implement the most stringent ecological environmental protection system, so that a good ecological environment will become a support point for sustained and healthy economic and social development. In recent years, China’s environmental governance has increased significantly, and government has issued a series of laws and regulations to protection environment. The environmental liability risks and environmental illegal costs of enterprises are increasing. Under the strict environmental supervision system, investment in environmental protection has become an indispensable investment for enterprises.
Can environmental protection investment give enterprises a competitive advantage and value added? Porter [
Overall, the studies show that environmental regulation can promote enterprises to increase investment in environmental protection, and whether environmental investment has promoted the value-added of enterprises, there is still controversy. In order to study the relationship between environmental protection investment and corporate value, this paper tests the impact of environmental protection investment on corporate value, and researches the mechanism of environmental investment to increase corporate value. The results of this study show that under the environmental supervision system of China, environmental protection investment behavior has played a positive role in the sustainable development of enterprises, and the economic incentive for environmental investment to add corporate value may be to increase the earnings of earnings.
The remainder of this paper proceeds as follows. Section 2 reviews the existing literature on environmental protection investment and corporate value, and develops testable hypotheses. Section 3 discusses our research design. Section 4 describes presents descriptive statistics, correlation coefficient and reports our main empirical results. Section 5 presents additional analyses. Finally, Section 6 sets our conclusions.
In this section, this paper provides theoretical arguments motivating hypothesis H1 that environmental protection investment is positively valued by markets. Then, based on the Ohlson valuation model, this paper explore the mechanism of environmental protection investment affecting market value, and Propose hypotheses H2 and H3.
With the prominent environmental problems such as smog and water pollution, China has paid more and more attention to environmental protection, and the supervision of heavily polluting enterprises has become more and more strict. Enterprises invest in environmental protection to improve severe pollution and meet social expectations. Therefore, companies investing in environmental protection are conducive to legitimacy. Legitimacy is a resource of an enterprise and can bring competitive advantage to the enterprise. López-Gamero et al. [
According to the stakeholder theory, the survival and development of any company is inseparable from the participation of various stakeholders. Environmental protection investment is a manifestation of corporate social responsibility, which can enhance the trust of stakeholders in the company, improve the relationship between shareholders and stakeholders, and thus improve the financial performance of the company. From the perspective of the government, good environmental performance can reduce the risk of environmental violations especially when the intensity of environmental control has reached a high level, and companies that actively invest in environmental protection often receive preferential policies such as tax breaks or government subsidies from the government [
In short, environmental protection investment is conducive to the company’s recognition of society and stakeholders, improving reputation and image, and thus promoting value added. Therefore, the first hypothesis is proposed:
H1: Environmental protection investment is positively valued by markets.
In hypothesis H1, this paper proposes that environmental investment can promote the increase of corporate value. However, whether environmental investment directly promotes the increase of corporate value or the value increase caused by acting on other variables remains to be discussed. Ohlson [
M V t = ( 1 − k ) B V t + k ( N I t ∗ R / r − D I V t )
where MVt = market value at the end of year t, BVt = book value at the end of year t, NIt = net income for year t, and DIVt = net dividends for year t. R = 1 + r, k is the evaluation multiplier, k = r ∗ ω / ( R − ω ) , where r = the cost of equity and ω is 1 + the growth rate in abnormal earnings.
According to Ohlson [
First, with respect to earnings persistence, environmental protection investment can improve the company’s earnings persistence, mainly reflected in the following three aspects: First, environmental protection investment promotes enterprises to adopt cleaner production methods, and avoid production suspension and rectification. Second, as a long-term investment, environmental investment is more reflected in the outflow of cash in the current period, and the cash inflow brought by it is more reflected in the future. Enterprises investing in new environmental protection projects such as sewage treatment system, recycled lead resource recycling project and slag resource comprehensive utilization project, may invest a large amount of capital, manpower and material resources in the current period of investment construction. However, during the period after it is completed and put into use, it can promote the recycling of resources and reduce the operating costs of enterprises. Third, according to Porter’s hypothesis, companies with greater environmental governance investments are more motivated to develop new products and technologies. Through technology or product innovation, environmental companies can enhance their competitive advantage and achieve sustainable development. When the earnings is more sustainable, it can better reflect the future cash flow. The higher the accuracy of the investor’s current earnings to predict future earnings, the higher the market value of the company [
H2: Environmental investment increases the market value of the company by increasing the persistence of the earnings.
Second, with respect to cost of equity capital, prior work argues that environmental investment may reduce investor risk expectations from both systemic risk and risk sharing. First of all, for environmentally friendly companies, investors’ perceived risk is significantly lower and the required return on investment is lower. Ghoul et al. [
H3: Environmental investment increases the market value of the company by reducing the cost of equity capital.
If market value, MV, is the present value of future expected dividends, then Ohlson (1989) show that value will be a linear combination of book value (BV), net income (NI), dividends (DIV), as shown in model (1). In order to examine the relationship between environmental investment and market value, following Rees and Valentincic [
M V i t = α 0 + α 1 B V i t + α 2 N I i t + α 3 D I V i t + ε (1)
M V i t = α 0 + α 1 B V i t + α 2 N I i t + α 3 D I V i t + α 4 E I i t + α 5 E I i t ∗ B V i t + α 6 E I i t ∗ N I i t + α 7 E I i t ∗ D I V i t + Industry + Year + ε (2)
where EI is the amount of environmental protection investment of the enterprise, which is measured by the increase in the current period of environmental protection projects under construction. If environmental investment can increase market value, then in the regression result of model (2), the coefficient of EI is significantly positive, or the coefficient of intersection of EI and the other three variables is significantly positive.
Follow the method used in most articles, we build the model (3) to examine the impact of environmental investment on the relationship one period ahead earnings and current earnings. Further, control other variables that may affect the persistence of earnings, and obtain the model (4). If environmental investments increase market value by increasing earnings persistence, then the coefficients of EI*NI are expected to be significantly positive in the regression results of model (3) and model (4).
N I i t + 1 = b 0 + b 1 N I i t + b 2 E I i t + b 3 E I i t ∗ N I i t + Industry + Year + ε (3)
N I i t + 1 = b 0 + b 1 N I i t + b 2 E I i t + b 3 E I i t ∗ N I i t + b 4 S I Z E i t + b 5 L E V i t + b 6 I N T A N i t + b 7 G R O W T H i t + b 8 L O S S i t + Industry + Year + ε (4)
In order to test the impact of environmental protection investment on the cost of equity capital, following to Xiao Zuoping [
R i t + 1 = γ 0 + γ 1 E I i t + γ 2 B P i t + γ 3 R O A i t + γ 4 S I Z E i t + γ 5 L E V i t + Industry + Year + ε (5)
where Rit+1 is the cost of equity of the enterprise, measured by three methods which are R_PEG calculated by PEG model, R_OJN calculated by OJN model and average number R_AVE of two above. If the assumption 3 is true, then the coefficient of EI is expected to be significantly negative.
As in Gregory et al. (2016), we estimate all models deflated by number of shares. All variables are defined in
Considering the environmental protection policies in China, this paper takes the 2008-2017 A-share heavily polluting industry companies as research samples. According to the catalogue of classified management of environmental checking industry of listed companies in China, 16 types of heavily polluting industries will be included in the scope of sample research. We choose 2008 as our final year because in 2008 green financial policy began to be implemented in China. In addition, we delete the sample companies of ST and ST*, and delete the sample companies for missing values.
We hand-collect the environmental protection investment data from the notes of the annual report disclosed by the companies, calculated by the amount of construction-in-progress that belongs to the environmental protection in the current period. The data of other variables are all from the CSMAR database.
The data of environmental investment is hand-collected from the notes of the companies’ annual report, the data of other variables are all from the CSMAR database.
0.028, indicating a significant portion of the profit is used to distribute dividends, and only a very small portion is used for environmental investments. In addition, using the PEG model and the OJN model to calculate the cost of equity capital requires three consecutive periods of financial data, resulting in fewer sample sizes. The mean values of the variables R_PEG and R_OJN for measuring equity capital are 0.137 and 0.160, respectively, which are compared with Li Huiyun and Liu Wei (2016) using the PEG model and Xiao Zuoping (2016) using the OJN model to calculate the cost of equity capital. The mean values of 0.14 and 0.148 are similar.
According to the Ohlson (1995) valuation model, the increase in the valuation coefficient before the net profit NI may be due to the change in the residual income growth rate w or the equity capital cost r. Therefore, the results in
The data of environmental investment (EI) is hand-collected from the notes of the companies’ annual report, the data of other variables are all from the CSMAR database. Figures in parentheses indicate t-values. ***, **, * represent statistical significance at 1%, 5%, 10%, respectively (two-tail).
The data of environmental investment (EI) is hand-collected from the notes of the companies’ annual report, the data of other variables are all from the CSMAR database. Figures in parentheses indicate t-values. ***, **, * represent statistical significance at 1%, 5%, 10%, respectively (two-tail).
The data of environmental investment (EI) is hand-collected from the notes of the companies’ annual report, the data of other variables are all from the CSMAR database. Figures in parentheses indicate t-values. ***, **, * represent statistical significance at 1%, 5%, 10%, respectively (two-tail).
Model (5) | |||
---|---|---|---|
R_PEG | R_OJN | R_AVE | |
EI | −0.012 | −0.035 | −0.026 |
(−0.44) | (−1.26) | (−0.94) | |
SIZE | −0.001 | −0.004 | −0.002 |
(−0.44) | (−1.26) | (−0.74) | |
BP | 0.035*** | 0.037*** | 0.036*** |
(6.44) | (6.44) | (6.42) | |
LEV | 0.073*** | 0.077*** | 0.072*** |
(4.82) | (4.81) | (4.63) | |
ROA | −0.092* | −0.124** | −0.107** |
(−1.87) | (−2.38) | (−-2.10) | |
cos | 0.214** | 0.085 | 0.026 |
(2.49) | (0.76) | (0.24) | |
Year effects | Yes | Yes | Yes |
Industry effects | Yes | Yes | Yes |
N | 1471 | 1419 | 1407 |
Adj-R2 | 0.242 | 0.252 | 0.254 |
The data of environmental investment (EI) is hand-collected from the notes of the companies’ annual report, the data of other variables are all from the CSMAR database. Figures in parentheses indicate t-values. ***, **, * represent statistical significance at 1%, 5%, 10%, respectively (two-tail).
the cost of equity capital, the regression coefficient of environmental protection investment on the cost of equity capital is not significant. The regression results cannot support the establishment of Hypothesis 3, so it is impossible to conclude that environmental protection investment increases market value by reducing the cost of equity capital.
Combined with the results of Tables 4-6, it can be concluded that environmental investment is conducive to the increase of market value, and value added by increasing the sustainability of earnings.
In order to better understand the value of environmental protection investment and clarify the effectiveness of environmental supervision policies, this paper examines the relationship between environmental protection investment and corporate market value by using A-share listed companies in the heavily polluting industry in 2008-2016 as research samples. The main conclusions are as follows: 1) Environmental investment is conducive to increase market value. Based on the Ohlson (1995) valuation model, the paper builds a model to examine the impact of environmental investment on market value. The regression results show that the coefficient of intersection of environmental investment and earnings is significantly positive, indicating that environmental investment can increase the valuation multiplier, indicating that environmental investment has a positive effect on the market value of the enterprise. 2) Environmental investment increases the market value of the company by increasing earnings persistence. According to the Ohlson (1995) valuation model, the increase in valuation multiplier may be due to the increase in earnings persistence or the reduction in the cost of equity capital. When using the regression model empirical test, the results show that environmental protection investment is conducive to increasing earnings persistence, but the impact of environmental protection investment on the cost of equity capital is not significant. Therefore, combined with the first conclusion, environmental investment has contributed to the increase in market value by increasing earnings persistence.
The research conclusions of this paper show that a strict ecological environmental protection system will promote enterprises to invest in environmental protection, promote production methods, and achieve synergy between development and environmental protection. Although environmental protection investment currently occupies corporate resources and leads to cash outflows, in the long run, environmental protection investment will help stabilize the operation of the company and make the company’s earnings more persistent.
The author declares no conflicts of interest regarding the publication of this paper.
Zhang, J.J. (2019) Environmental Protection Investment and Market Value. Modern Economy, 10, 399-411. https://doi.org/10.4236/me.2019.102027