Does the Stock Market Value the
Firm’s Potential Chemical Risk
Released and Transferred? :
Empirical Study on the Japanese
Pollutant Release and Transfer
Register System
Yukiko Omata
Tokyo Institute of Technology
Department of Social Engineering
1
Back ground of my research
Conventional policy
(command-and-control regulations, environmental taxies）
→ voluntary instruments, information provision policies
It is important for firms to be valued for less pollution in the
market.
Why market values the firms with less polluting?
→Firms with high polluting levels may face greater risk
of environmental liabilities and lawsuit.
→ Investors are therefore likely to prefer firms that
pollute lower levels.
2
Purpose of my research
1. Does financial market value pollutions
of the firm negatively?
2. Does financial market distinguish the type of
pollutions?
3
The Pollutant Release and Transfer Register
(PRTR) system
1. This is information provision policies in Japan.
2. This system has been in force since 2001.
3. The facilities handling chemical substances potentially
hazardous to the environment
need to estimate annual amounts.
4. The government has been releasing to the public
annually.
4
On-site releases and Off-site transfers
Releases to air
manufacture
Raw materials
Transfers to off-site
Releases to the land
Transfers to sewage
Releases to the public
water bodies
5
The amounts of reported releases and transfers.
600000
500000
400000
300000
200000
100000
0
2001
2002
on-site releases
2003
2004
off-site transfers
2005
total
2006
6
The ratio of emissions to total amounts
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2006
2005
2004
2003
2002
2001
off-site transfers
on-site releases
7
Previous studies
Previous studies
Hart and
Ahuja(1996)
Economic
performance
ROA
ROE
ROS
Abnormal
returns
Khanna, Quimio
andBojilova
(1998)
King,A.A. and
Tobin’s q
Lenox, M.J.(2002) ROA
Dowell, Hart and
Yeung(2000)
Konar and
Cohen(2001)
Total
－
－
－
×
Findings
on-site
off-site
releases transfers
－
＋
－
－
Tobin’s q
－
Tobin’s q
－
8
Contribution of this paper
1. There is few studies that relationships between market
value and emission reduction in Japan.
2. I distinguishes between on-site releases
and off-site transfers to examine whether information
provision has differential impacts on pollutants.
9
Data
Sample
140 firms from Nikkei300
(food and beverage; pulp and paper; chemical; pharmacy; oil; tuber;
steel; nonmetal; machinery; metalworking; electric equipment;
automobile; electric machinery; precision instrument; textiles;
transportation; construction; gas)
840 firm-year observations for the year 2001-2006.
10
Model
 emissions 
 advertisement 
excess  valueit   0  1 
  2 

sales
 sales  it 2

 it 1
 currentearnings 
R&D
 emissions   currentearnings 
 3 
  4 
  5 
 

sales
sales

 it 1
 sales  it 1
 sales  it 2 
 it 1
 emissions   advertisement 
 6 
 
   it
sales
 sales  it 2 
 it 1
11
Variables
variables
indication
Market value
Excess value=
[market value-booked value]/sales
Emissions /sales
On-site releases/sale
Off-site transfers/sales
Total/sales
current
earnings/sales
profitability
12
advertisement
expenditures/sales
R&D/sales
Consumer pressure
Degree of innovativeness
Emissions/sales*
current earnings/sales
Firms with high profitability
have less pollutions
Emissions/sales*
advertisement/sales
Firms with high consumer
pressure have less
pollutions
13
Regression Analysis Technique
1. Endogeneity problem
Unknown variable may affect both reductions of
emissions and the market value of the firm.
2. Causation between market value and chemical risk.
(not correlation)
→Lagged variables help ascertain the causal
relationships between market valuation and
environmental performance
14
Result
variables
total
On-site
releases
Off-site
transfers
Emissions/sales
－0.021
－0.95**
＋0.0094
－9.08**
－0.23
Emissions/sales*
－0.34
current earnings/sales
Emissions/sales*
advertisement/sales
－10.33** +183.9**
－1.71**
***, ** and * indicate statistical significance at the 1% level, the 5% level and
the 10% level respectively
15
Total effects
Total effects
On-site releases
－
Off-site releases
＋
total
＋
16
Findings
1. Firms with high on-site releases have negatively effect to
market value.
2. Firms with high off-site transfers and total pollutions have
positively effect to market value.
3. Firms facing high consumer pressure have less total
emissions or off-site transfers.
4. Firms facing high consumer pressure have more on-site
releases.
17
Conclusions
Market values firms with less polluting in Japan.
18