ENVIRONMENTAL PERFORMANCE VS. FINANCIAL PERFORMANCE, MARKET INEFFICIENCY AND INVESTMENTS

It is challenging to de ne corporate environmental performance or corporate nancial performance. In this study, a company is considered to have good environmental performance (namely, be green, environment-friendly or environmentally responsible) if it is among the Top 100 of the 500 US greenest companies ranked by Newsweek, or has environmental strength(s) and no environmental concern in terms of the KLD ratings. A company is regarded to have good nancial performance if it has a high raw return, Sharpe ratio, and excess (or abnormal) return over various benchmarks. Preference will be given to excess return estimated using the Carhart four-factor model [14]. A previous published longitudinal study, co-authored with my advisor [13], unveils that: 1) environmentally responsible companies tend to experience signi cantly positive abnormal performance in the long horizon (e.g. from the fourth to seventh year after being selected); 2) the value-adding e ect and the market's upward price adjustments on undervalued intangible environmental strength(s) might have resulted in the long-term outperformance. Would environmentally responsible companies still outperform during shorter horizons, such as the event period of an environmental disclosure? Using event study methodologies, this paper investigates market responses to independent Newsweek environmental disclosures by analyzing cross-sectional and time-series abnormal security returns. Results suggest that the Top 100 greenest companies tend to display signi cant abnormal returns within 4 days after a disclosure, and the signi cant abnormal returns generally persist for no more than 3 trade days. e.g., the Carhart four-factor abnormal return, with statistical signi cance, is averaged at 0.50% per day over the four disclosure events. The ndings are robust to di erentmodels of normal return, removal of outliers, elimination of confounding e ects, controlling for characteristic factors, and adjusting for cross-sectional correlation and volatility shift on test statistics using BMP-adjusted technology[56]. Signi cant abnormal returns over the event period may indicate ine ciency of the nancial market. Fama-Macbeth regressions further reveal that short-horizon abnormal returns could be explained by a spectrum of characteristic variables, green investing, arbitrage trading, and/or various psychological biases. Complementing the cited longitudinal study, a portfolio-level comparison reveals that an actively managed green portfolio outperforms an actively managed nongreen portfolio in terms of raw return and risk-adjusted measures such as Sharpe ratio, Jensen's alpha and Fama-French alpha in the long horizon. The results are robust to di erent portfolio weighting technologies and the consideration of turnover costs. In addition, the green portfolio's outperformance is driven by a bunch of small, aggressive and relatively inactive stocks that have better performance than the market predicts. No evidence shows that the ever-increasing demand on green securities leads to the green portfolio's outperformance, because green stocks are actually less actively traded. Panel regressions further indicate that long-horizon corporate economic performance positively correlates to historical corporate environmental performance.Ph.D. in Management Science, July 201