1. Environmental reporting through financial statements: the Peruvian evidence Samuel Mongrut Montalván Jesús Tong Chang

2. Mongrut-TongUNIVERSIDAD DEL PACIFICO2 Introductory notes (I) This presentation involves the results of two papers: –Environmental reporting through financial statements: The Peruvian evidence –Is there a market payoff for being green at the Lima Stock Exchange? These two papers are part of a broader research funded by the Santander Bank Central Hispano Chair: “Environmental accounting for Peru: practices and proposals”

3. Mongrut-TongUNIVERSIDAD DEL PACIFICO3 Introductory notes (II) This research includes two previous papers: –Environmental accounting and reporting: the search for a Peruvian framework –Reporte medioambiental a través de los Estados Financieros: un marco regulatorio para el Perú. In Peru it is compulsory to apply the IAS (or IFRS) and alternatively one may apply the U.S. GAAP.

4. Mongrut-TongUNIVERSIDAD DEL PACIFICO4 Environmental reporting through financial statements: the Peruvian evidence 1.Research questions 2.Sample 3.Preliminary results (we are still collecting surveys!) 4.Preliminary conclusions

5. Mongrut-TongUNIVERSIDAD DEL PACIFICO5 1. Research questions A.Do firms that operate in Peru report their environmental costs, expenses, liabilities and revenues? Which media do they use to report them? B.Do these firms know and use environmental management tools? Which ones? C.What are the reasons to adopt an EMS for firms operating in Peru? D.Other issues are also being analyzed: regulatory standards, use of EMA tools,etc.

6. Mongrut-TongUNIVERSIDAD DEL PACIFICO6 2. Sample A.We have a total sample of 42 firms. 30 firms with ISO 14001 certification granted (population–31/08/2003) and 12 firms with EMS (unknown population) B.The following results correspond to 21 firms with ISO 14001 granted and 6 firms with EMS.

7. Mongrut-TongUNIVERSIDAD DEL PACIFICO7 2. Sample (II): Total composition

8. Mongrut-TongUNIVERSIDAD DEL PACIFICO8 2. Sample (III): Up to now

9. Mongrut-TongUNIVERSIDAD DEL PACIFICO9 3. Preliminary results (I): RQ 1a

10. Mongrut-TongUNIVERSIDAD DEL PACIFICO10 3. Preliminary results (I): RQ 1b

11. Mongrut-TongUNIVERSIDAD DEL PACIFICO11 3. Preliminary results (II): RQ 2

12. Mongrut-TongUNIVERSIDAD DEL PACIFICO12 3. Preliminary results (III): RQ 3

13. Mongrut-TongUNIVERSIDAD DEL PACIFICO13 4. Preliminary conclusions A.Although environmental expenses, revenues, liabilities and assets are identified, registered and reported, most of them are reported by means of stand-alone reports and the annual report. B.Very few firms know and use EMA tools. C.The most important reasons to adopt EMS seems to be its accordance with the environmental charter of the company and to improve environmental performance: A true commitment with the environment?

14. Mongrut-TongUNIVERSIDAD DEL PACIFICO14 Is there a market payoff for being green at the Lima Stock Exchange? 1.Research questions 2.Methodology and tests 3.Sample 4.Results 5.Conclusions

15. Mongrut-TongUNIVERSIDAD DEL PACIFICO15 1. Research question A.Several studies have detected abnormal returns or above average risk-adjusted returns attached to environmental responsability especially in the U.S. Examples White (1995), Cohen, Scott and Naimon (1995), Soyka y Feldman (1998) and so on. B.This study adresses the following question: Do traded firms at the LSE offer abnormal returns around the announcement date of an ISO 14001 certification?

16. Mongrut-TongUNIVERSIDAD DEL PACIFICO16 2. Methodology and tests (I) A.We have used a typical event study analysis. B.We estimated the abnormal returns using four especifications: –The Constant-Mean-Return-Model –The Index Model with three different especification for the estimation of its parameters: the Market Adjusted Model (alpha=0 and beta=1), the GARCH model, and the model of Theil (where alpha and beta are the median of their respective distributions)

17. Mongrut-TongUNIVERSIDAD DEL PACIFICO17 2. Methodology and tests (II) A. For each model especification we determined the significance of the abnormal returns (for the whole sample) using four different tests: two parametric tests (J1 and J2) and two non- parametric tests (J3 and J4). (Details about the maths in the paper). B. However, since we have only 10 observations available the tests are only indicative, but not conclusive.

18. Mongrut-TongUNIVERSIDAD DEL PACIFICO18 2. Methodology and tests (II) A.J2 is more robust than J1 B.J1 and J2 are really not suitable tests because stock returns in emerging markets (in Peru) have excess kurtosis and are skewed. C.J3 (the sign test) may not be well specified if the distribution of abnormal returns is skewed. This could be overcomed with the generalized sign test. D.J4 (the rank test of Corrado) could lose power if abnormal returns are highly volatile.

19. Mongrut-TongUNIVERSIDAD DEL PACIFICO19 2. Methodology and tests (II) E.Given the previous comments we should expect a bad performance of J4 and we must regard J1-J3 with caution given the short sample (all tests are based upon asymptotic results). F.The null hypothesis in all tests is that the given event has no impact on the behavior of security returns. A rejection of the null leads to the presence of abnormal returns.

20. Mongrut-TongUNIVERSIDAD DEL PACIFICO20 3. Sample (I) 1.From the population of 30 firms with ISO 14001 certification granted, only 14 firms were traded at the LSE. 2.From these 14 firms, only 10 firms fulfilled the sample requirements. 3.Sample requirements: Estimation window: 214 daily obs. Event window: 61 daily obs. Announcement date: month/year

21. Mongrut-TongUNIVERSIDAD DEL PACIFICO21 3. Sample (I): Composition

22. Mongrut-TongUNIVERSIDAD DEL PACIFICO22 3. Sample (I): Composition

23. Mongrut-TongUNIVERSIDAD DEL PACIFICO23 4. Results (I): Mean-Constant Return Model CAAR-Mean constant return model

24. Mongrut-TongUNIVERSIDAD DEL PACIFICO24

25. Mongrut-TongUNIVERSIDAD DEL PACIFICO25 4. Results (II): Market Adjusted Model CAAR-Market adjusted model

26. Mongrut-TongUNIVERSIDAD DEL PACIFICO26

27. Mongrut-TongUNIVERSIDAD DEL PACIFICO27 4. Results (III): GARCH (1,1)

28. Mongrut-TongUNIVERSIDAD DEL PACIFICO28

29. Mongrut-TongUNIVERSIDAD DEL PACIFICO29 4. Results (IV): Theil

30. Mongrut-TongUNIVERSIDAD DEL PACIFICO30

31. Mongrut-TongUNIVERSIDAD DEL PACIFICO31 5. Conclusions A.One is able to detect traces of abnormal returns in the four specifications, but the magnitude of these returns is low. B.The especifications with less restrictions (GARCH and Theil) perform the best. C.As expected, parametric tests are not helping much, as well as the rank test of Corrado.

32. Mongrut-TongUNIVERSIDAD DEL PACIFICO32 5. Conclusions D.From the tests one suspect the existence of information leakage for the days before the announcement (about 20 days). E.There seem to be also abnormal returns in the announcement date and some weeks later.