Author(s): Islam Elshahat, Rabab Abdou, Sherine Elmohr, Amr ElAlfy
This study investigates the relationship between environmental performance and firms’ cumulative annual stock returns from three main perspectives. First, this study starts by considering individual environmental measures that are sorted as six strength variables and seven concern variables that are then individually regressed on cumulative stock returns to identify the relationship between individual environmental performance measures and firms' annual stock returns. Results of this regression indicate that none of the individual environmental strength or concern variables is significantly related to firms’ cumulative annual returns. Second, to have an overview on the relationship between overall environmental measures and cumulative stock returns, three environmental indices are constructed which are: Total Strength Rating, Total Concern Rating and Overall Environmental Rating Score and the relationship between cumulative stock returns and each of these indices is investigated. The regression results show that the environmental strength rating variable and overall environmental rating variable have a significant negative effect on firms’ stock market performance. The evidence presented supports the perspective that investors perceive that environmental activities represent additional costs on firms that negatively affect financial performance. However, the relationship between cumulative stock returns and environmental concern rating variable turns to be insignificant which indicates that firms that attempt to disregard the environment do not witness any significant changes in their financial performance.