Toxic chemical releases and idiosyncratic return volatility: A prospect theory perspective |
| |
| Authors: | Stephen Bahadar Muhammad Nadeem Rashid Zaman |
| |
| Institution: | 1. Department of Finance, Auckland University of Technology, Auckland, New Zealand;2. Department of Accountancy and Finance, Otago Business School, University of Otago, Dunedin, New Zealand;3. School of Business and Law, Edith Cowan University, Joondalup, Western Australia, Australia |
| |
| Abstract: | We investigated whether and how firms’ toxic chemical releases (TCRs) affect idiosyncratic return volatility (IRV) using a prospect theory lens. Utilising a large sample of US public listed firms over the period 2001–2018, we find a significant and positive association between TCRs and IRV, suggesting that firms releasing more toxic chemicals have higher IRV. Additional analyses show that a positive association between TCR and IRV is more evident among firms with (i) high revenue, (ii) lower financial constraints and (iii) fewer environmental violations. A further test also suggests that a positive association between TCRs and IRV is contingent on political leadership ideology and market states. Our results remain consistent with weighted TCRs, IRV based on the Fama–French three-factor model, fixed-effect two-stage least square estimator (FE-2SLS), and other robustness checks. These findings shed light on the role of equity markets as a driver for capital-intensive pollution abatement activities and enhanced compliance with environmental laws, standards and best practices. |
| |
| Keywords: | Fama–French three-factor model idiosyncratic return volatility prospect theory toxic chemical releases |
|
|
