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

2 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.

3 Purpose of my research 1.Does financial market value pollutions of the firm negatively? 2.Does financial market distinguish the type of pollutions?

4 The Pollutant Release and Transfer Register (PRTR) system 1.This is information provision policies in Japan. 2.This system has been in force since 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.

5 Releases to air Releases to the public water bodies Releases to the land Transfers to sewage Transfers to off-site Raw materials manufacture On-site releases and Off-site transfers

6 The amounts of reported releases and transfers.

7 The ratio of emissions to total amounts

8 Previous studies Economic performance Findings Totalon-site releases off-site transfers Hart and Ahuja(1996) ROA ROE ROS －－－－－－ Khanna, Quimio andBojilova (1998) Abnormal returns × －＋ King,A.A. and Lenox, M.J.(2002) Tobin’s q ROA －－－－ Dowell, Hart and Yeung(2000) Tobin’s q － Konar and Cohen(2001) Tobin’s q －

9 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.

10 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

11 Model

12 Variables variablesindication Market valueExcess value= [market value-booked value]/sales Emissions /salesOn-site releases/sale Off-site transfers/sales Total/sales current earnings/sales profitability

13 advertisement expenditures/sales Consumer pressure R&D/salesDegree 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

14 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 Regression Analysis Technique

15 variablestotalOn-site releases Off-site transfers Emissions/sales － － 0.95** ＋ Emissions/sales* current earnings/sales － 0.34 － 9.08** － 0.23 Emissions/sales* advertisement/sales － 10.33** ** － 1.71** Result ***, ** and * indicate statistical significance at the 1% level, the 5% level and the 10% level respectively

16 Total effects On-site releases － Off-site releases ＋ total ＋

17 1.Firms with high on-site releases have negatively effect to market value. Findings 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. 2.Firms with high off-site transfers and total pollutions have positively effect to market value.

18 Conclusions Market values firms with less polluting in Japan.