Business Strategy and the Environment Bus. Strat. Env.

21, 4959 (2012) Published online 27 April 2011 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/bse.713

Environmental Policies and Firm Value

Basil AlNajjar* and Aspioni Anmiadou
Middlesex University Business School, Middlesex University, London NW4 4BT, UK ABSTRACT Many organizations are currently becoming more environmentally friendly. Ecoefciency maximizes the effectiveness of a business operation while reducing its impact on the environment; with the necessary skills, organizations can create more value while using less input. Prior empirical studies have suggested that rms engaging in ecoefcient activities are better valued than those without such activities. Therefore, this will enhance business efciency and excellence. This study investigates the link between ecoefciency, as environmental policy, and rm value in the United Kingdom (UK) for the period 1999 to 2008. We generate new insights into environmentalnancial performance by using different denitions of the term ecoefciency. In the UK context our results support that ecoefcient rms have higher market values than those lacking environmental strategies. Hence, we recommend that rms become involved in environmental polices since the adoption of these polices will have a positive impact on rm value. Copyright 2011 John Wiley & Sons, Ltd and ERP Environment.
Received 6 February 2011; revised 10 March 2011; accepted 17 March 2011 Keywords: ecoefciency; market value; ISO14001; UK

Introduction

LIMATE CHANGE HAS ATTRACTED CONSIDERABLE ATTENTION AND DEBATE IN RECENT YEARS, LEADING MANY INDUSTRIES

and organizations to adopt green attitudes. Nowadays, businesses focus on how to enhance their environmental frameworks to improve their business processes. Therefore, ecoefciency, the main premise of this empirical study, is used to assess the relationship between environmental polices and rm value in the UK. The link between environmental activities and good economic performance is not new (see, for example, Belkaoui, 1976; Anderson and Frankle, 1980). In contrast, others detect that there is no such positive relationship. Thus, Freedman and Jaggi (1982), Ingram and Frazier (1980) and Walley and Whitehead (1994) argue that environmental actions are costly as extensive research technologies are involved in developing green processes or products to reduce harmful impacts on the environment and adhere to ecoefciency standards. Consumers increasingly favor environmentally friendly rms, and therefore more rms are taking the opportunity to maximize their prot while reducing costs by investing in ecofriendly projects. Ecoefciency (EE) serves as a management control mechanism to reduce a rms impact on the environment and simultaneously create more value for shareholders (Markus, 2000; Sinkin et al., 2008). The economic literature identies this as the ratio of economic value added to environmental damage added (Figge and Hahn, 2004). The concept of EE has been discussed by the World Business Council for Sustainable Development (WBCSD), where EE can be achieved by the delivery of comparatively priced goods and services that satisfy human needs and

*Correspondence to: Basil AlNajjar, Accounting and Finance, Middlesex University, London NW4 4BT, UK. Email: b.alnajjar@mdx.ac.uk
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B. AlNajjar and A. Anfimiadou

bring quality of life, while progressively reducing ecological impacts and resource intensity throughout the life cycle, to a level at least in line with the earths estimated carrying capacity (World Business Council for Sustainable Development Report, 2002, p. 5). From the WBCSD, it can be noted that EE includes features which direct rms towards higher efciency levels. These characteristics comprise: reduction of toxic materials; increased recycling of waste; and use of renewable materials. In such circumstances, rms are urged to adopt these ecoefcient practices as they can benet from both internal and external advantages. At the rm level, businesses are able to benet from falling costs of materials and higherquality products. Externally, those ecoefcient rms benet from government regulations on the environment, the existence of competition and better access to capital. All these benets are derived by rms with plans to protect the environment (see Ct et al., 2006). Sinkin et al. (2008) assess EE as a framework where rms increase their value by increasing the effectiveness of business processes and simultaneously reducing harmful environmental effects. It is worth noting that the denition of EE varies among studies. For instance, in the Finnish study of Erkko et al. (2005), EE is expressed as the ratio of economic value of rms to their environmental impact. A similar denition is adopted by Helminen (2000). As a result, EE refers to several aspects favoring an environment framework (which includes the reduction of pollution or emission and recycling of waste). Nevertheless, all these denitions have the same objective of enhancing the protection of the environment. Thereby, rms adopting these environmental strategies can increase the structure of environmental management and become ecoefcient, and consequently increase business efciency. Our empirical analysis appears to be the rst in the United Kingdom (UK). It extends the work of Sinkin et al. (2008) and examines whether UK ecoefcient rms are highly valued in comparison with nonecoefcient rms, using different ways to dene EE from 1999 to 2008. First, we test EE as reected by ISO 14001, an external environmental certication. Firms must also have had corporate social responsibility (CSR) or sustainability reporting for ve or more years. In order to observe the power of the above denition, EE is also indexed by participation in two indices for a minimum of 5 years: the Business in the Environment (BiE) and FTSE4Good indices. By evaluating rm value in terms of EE performance, evidence is provided on the potential of value creation through environmental investments. Our main conclusion is that ecoefcient companies have higher market prices in comparison with noneco efcient rms; this does not change substantially across the EE denitions used. The remainder of the paper is organized as follows: the next section highlights the environmental context in the UK, then there is a literature review; after that we describe the data and outline our methodology and then discuss the results. Our conclusions are in the nal section.

The Environmental Context in the UK

The Corporate Responsibility Exchange (CRE) requires listed companies to be active in CSR, while the FTSE4Good index has a ranking for environmentally friendly and socially aware organizations. Operating and Financial Review (OFR) has also been in effect since 2005 and requires all listed rms to notify the public of their means of dealing with different environmental and social concerns (Idowu and Papasolomou, 2007). Over 80% of UK FTSE 100 organizations voluntarily publish CSR reports, although this remains voluntary and there is no specic format for reporting activities. No external body audits CSR reports and hence investors may doubt their reliability. The Kyoto Protocol is an international environmental law rst introduced by the United Nations in 1992. The treaty was reinforced in February 2005 with a major objective and a signicant target for tackling climate change by reducing greenhouse gas emissions to a certain level for each industry and country (Dessai et al., 2003). The protocol has been criticized ever since it became law. US economists criticize the fact that the aim of the protocol is to achieve a certain target limitation, arguing that it should concentrate more on reducing emission levels. However, environmentalists and scientists claim that the commitments are too exible and stronger rules should be imposed (Grubb, 2002). The UK has adopted the Kyoto Protocol. In 1999 the British Government introduced an incentive of an 80% discount from the Climate Change Levy in exchange for reducing carbon emission and energy use through climate change agreements (CCAs). The government has also passed legislation that allows the imposition of nancial penalties on corporations not following certain environmental schemes (McGinness, 2001). In addition, Ekins and
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Etheridge (2006) argue that there are opportunities to save funds in energy efciency processes. The rst period of agreed action for the UK to reduce 85.7% of 1990 levels of gas emissions. The annual report is seen as a main communication medium and source for researchers to investigate environmental disclosures (Gray et al., 2001). The study adopts environmental reporting in the CSR report as one criterion when dening EE. McWilliams and Siegel (1999) argue that the major reason for adopting and publishing CSR is to satisfy rms shareholders. The above discussion shows the importance of environmental actions for UK rms, and hence we are employing different denitions for EE to address the different procedures UK rms use to show concern toward the environment (for more details see Empirical Analysis).

Literature Review
EE was rst dened in 1991 as a mechanism for creating more value by using fewer resources (Markus, 2000). The WBCSD describes it as a management philosophy that aims to increase prot while also reducing the impact on the environment. It considers new managerial strategies and movements which can generate business opportunities and competitive advantage for rms (Porter, 1991). Different studies, theoretical and empirical, discuss and analyze the relationship between environmental activities and nancial performance, in contrast with the relatively limited number of EE analyses and studies. Sinkin et al. (2008) suggest that ecoefcient rms are valued more highly by the market and their rm value is actually higher than that of non ecoefcient rms. There is no available conclusive result regarding the relationship between environmental activities and nancial performance, as multiple factors have rendered previous research of limited use. These include: small sample size, no specic denition of becoming greener and a lack of sound theoretical foundations (Wagner, 2001). Conicting results stress the complex nature of the relationship between environmental polices (performance) and rm performance (Corbett and Klassen, 2006). Different types of studies evaluate the relationship between environmental changes and stock market behavior. The rst method for such investigation has been the event study, which aims to establish the best link between environmental and shortrun stock market performance. The second type of analysis is regression methodology, which is considered to explain the abovementioned longterm relations based on accounting indices. The rst scheme of research in this area includes Shane and Spicer (1983), who report that the disclosure of external information such as the minimization of pollution affects investors view of rms expected costs and the potential regulation that could be applied to particular rms. Freedman and Jaggi (1982) investigate the relationship between pollution disclosure and nancial performance, which shows no signicant correlation. Such a verdict is based upon a 1year period (197374) testing 109 rms. Moreover, Blacconiere and Patten (1994) examine the market reaction of 47 chemical rms to the Union Carbide leak event in India in 1984. They argue that the catastrophe had a major negative impact on chemical rms while the impact on those rms that produced environmental reports prior to the leak was less. Similarly, Blacconiere and Northcut (1997), investigating the period 198586, studied 72 chemical rms and conclude that extensive environmental reports are indeed perceived as a positive sign by investors. Klassen and McLaughlin (1996) investigate the environmental management effect and establish that there is a positive return for good environmental management and a negative return for pathetic environmental management. Jacobs et al. (2008) argue that the market is selective in responding to environmental performance declarations. They state that the market does not react to announcements of corporate environmental initiatives, nor to environmental awards and certication by third parties. However, it seems that the market responds signicantly to certain types of announcements, such as positively to ISO 14001 certication and negatively to voluntary emissions reductions. The second type of papers investigate the relationship between CSR and stock returns, adopting regression analysis. Some empirical studies consider CSR as either a dependent or independent variable and report a positive relationship between the two (Anderson and Frankle, 1980; Belkaoui, 1976; Bowman, 1978; Fry and Hock, 1976; Preston, 1978; Scholtens, 2008). On the other hand, others suggest a negative association (Freedman and Jaggi,
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B. AlNajjar and A. Anfimiadou

1982; Ingram and Frazier, 1980). Ullmann (1985) argues that the main reason behind these contradictions is the different methods of measurement of social disclosure variables. Johnson (1996), using many measures based on the US Toxic Release Inventory (TRI), states that specic types of environmental performance in a particular industry sector are positively associated with better nancial performance. He uses accounting measures such as return on assets and return on equity to support his statement. The following year, by using the same index as Johnson (1996), Cordeiro and Sarkis (1997), additionally test the relationship between environmental and economic performance. However, they use oneyear earnings per share and veyear earnings per share growth forecast. Their study has several limitations such as the denition of environmental performance measures (Wagner, 2001). Thomas and Tonks (1991) test the relationship between stock returns and environmental actions. Using a sample of UK rms, they nd that environmental policies adopted by rms linked with strong pollution actually improves their stock returns. However, during the period 199597 the excess return was reduced. Other ndings indicate that rm size has a positive effect on the possibility of environmental measures (see, for example, Welch et al., 2002). Guenster et al. (2006) detect that ecoefciency is positively related to market value. They also report that ecoefcient rms underperform in comparison with nonecoefcient rms. Certainly they disagree with CSR academics that the benets associated with environmental policies are higher than the costs. The second major point is the positive and time varying relation between eco efciency and rm valuation as measured by Tobins Q (Guenster et al., 2006:4 part 6). This suggests that the share prices of ecoefcient rms are undervalued at the beginning of such implementation but afterwards price correction is attained. Sinkin et al. (2008) argue that rms which follow ecoefcient strategies have lower costs involved while their prot is increased and they are valued highly by the market. They dene ecoefcient rms as those that have external certication and auditing (ISO 14001) and Corporate Reporting (CR). From their sample of rms (2003, Fortune 500) only 95 were ecoefcient. They report that ecoefcient rms have positive market value compared with nonecoefcient rms. Pogutz and Russo (2009) provide evidence that rms that care about environmental issues have increased market value as well as an improved nancial performance in the short term. Portfolio study is the third technique which analyses the benets of CSR for future investment decisions (for more discussion, see Wagner, 2001; Guenster et al., 2006; Jacobs et al., 2008). From a business perspective, Dyllick and Hockerts (2002) argue that the use of ecoefcient services is not necessarily the only way to enhance sustainability. They discuss that rms should rather stress an appropriate amount of CO2 emissions. Other studies argue that the adoption of EE does not necessarily protect the environment for businesses on a longterm basis. Young and Tilley (2006) point out that rms should align their business processes with EE. In so doing, they will be able to enhance business performance and excellence as well as considering environmental implications. Therefore, they suggest that the concept of ecoeffectiveness requires that rms should develop new systems and processes in carrying out business operations and methods to recycle waste. Additionally, the development of such processes requires upfront capital, but with the current economic crisis rms might be reluctant to invest in EE investments to reduce harmful environmental activities. Prior empirical evidence of an effect of the environment on rms strategies has been investigated, in which potential benets can be found when adopting the concept of environmental sustainability. For instance, Weber et al. (2010) investigate the evidence between environmental sustainability and credit rating by using a questionnaire approach to around 40 German banks. After obtaining information about 58 criteria of sustainability, they conduct a twostep analysis in which they observed that sustainability is able to predict the credit viability of debtors and thereby enhance the predictive process. Hence, it can be argued that the inclusion of sustainability in predicting credit rating improves the risk management process of rms. In so doing, rms performances will be increased. Albino et al. (2009) adopt content analysis of a sample of companies from the Dow Jones Sustainability World Index. They stress the importance of environmental sustainability by selecting appropriate business processes such as green processes. Therefore, they examine whether rms engaged in the development of green products adopt strategies based on the environment as compared with nongreen rms. From their ndings, they demonstrate that rms engaged in green product development have a wider array of environmental strategies than nongreen product developers. In addition, they found that economic sector and geographical location, or where rms are based, play a signicant role in environment strategies. They noted that the strategies varied by sector and location. Wahba (2008) apply regression analysis by associating institutional ownership and environmental responsibility. Wahba
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argue that rms adhering to ISO 14001 standards positively inuence institutional ownership of Egyptian rms. Therefore, it could be discussed that rms with good environmental responsibility serve as a signal for institutional investors. It is frequently argued that environmental aspects can also inuence agency theory. This dimension has been examined by Berrone and GomezMejia (2009), who investigate the relationship between environmental features and CEO compensation in a US context. They observe a positive association between environmental performance and CEO pay, suggesting that such rms denote survival capabilities and therefore compensate CEOs. They further suggest that rms having an environment committee and environment pay framework positively inuence CEO pay. Engaging in environmental activities, such as reducing pollution or gas emissions, are part of managers responsibilities where product redesign or processes are required. In such a case, managers may divert resources to more concrete projects instead of investing in expensive environmental development. However, Russo and Harrison (2005) argue that managers may be disposed to adopt easy strategies and actions to mitigate harmful effects after seeing the importance of environmental effects. Hence, a way to motivate management is to focus on environmental sustainability; CEOs are rewarded as an incentive to work towards enhancing environmental performance by developing appropriate strategies and processes within rms strategic planning process. Consequently, this will result in higher business efciency and excellence. From the above discussion of the literature, there is limited evidence in the UK literature regarding EE and rm value. This study aims to bridge the gap in the EE literature and provide further evidence about EE within the UK context.

Data and Methodology

Data The sample is taken from the UK FTSE 350 index, which comprises the largest 350 companies listed on the London Stock Exchange (LSE). We match the 350 companies that have the required nancial data with the BiE index. We exclude all investment trusts as they are excluded from the BiE index. This leaves us with 201 rms that have provided the required information for the EE variables. We use DataStream to collect the nancial data. Table 1 reports the descriptive statistics of the variables investigated in this paper. On average, UK rms have an earnings per share (EPS) of 0.30, indicating a low EPS which rises. Our variable of interest is EE which has a mean 46.8%, indicating that around 47% of the rms in the sample are EE rms. This demonstrates that in the UK most of rms do not adhere to the concept of EE. It can be seen that leverage has a mean of around 18%, showing low debt levels. This explains that UK rms have less reliance on debt nancing. Additionally, low protability levels prevail, with the mean of 7.16 % for the rms in the sample.

Variable MP EPS BV EE LEV FIRMSIZE ROA LOGRD

Obs. 2009 2009 2010 2010 2010 2010 1998 687

Mean 5.280297 0.297533 2.431406 0.467662 0.179984 6.205719 7.162573 9.635448

SD 5.475916 0.651021 3.56851 0.499077 0.162844 0.828408 9.134316 1.988493

Min. 0.062 6.401 2.15 0 0 4.22 108.96 4.60517

Max. 52.46 8.686 55.401 1 1.1338 9.38 69.85 14.78548

Table 1. Descriptive statistics MP, market price; EPS, earnings per share; BV, book value; EE, ecoefciency dummy variable; LEV, total debt to total assets ratio; FIRMSIZE, natural logarithm of total assets; ROA, return on assets; LOGRD, natural logarithm of research and development expenses.
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From the correlation matrix, we notice that there is not a high correlation between the variables, with the exception that EPS is signicantly correlated with book value (BV). However, when we run the variance ination factor, the result indicates there is no multicollinearity between the two variables. Some studies use environmental performance indicators (EPI) to measure the effect of a company on the environment. For example, they measure the use of natural resources or emissions (Figge and Hahn, 2004). Most data used in these studies are drawn from the US Toxic Release Inventory (TRI), a database that contains information on toxic chemical releases and waste management activities. For example, Hamilton (1995) adopted this direct environmental index to conduct his research. Other investigators use indirect proxies to measure rm impact. For example, Klassen and McLaughlin (1996) applied external environmental awards to examine whether companies with an environmental certicate achieve a better nancial result. This paper uses different measures to dene EE. The study exploits the international standardization environmental certicate (ISO 14001) as the rst indicator (Klassen and McLaughlin, 1996; Verfaillie and Bidwell, 2000; Marshall and Brown, 2003; Holland, 2003; Sinkin et al., 2008). ISO 14001 is used as a tool to meet internal and external objectives such as assuring employees and stakeholders on environmental issues. It is important to make clear that the paper includes all the rms that have at least one of their divisions or subsidiaries certied with ISO 14001 in the UK between 1999 and 2008. In order to nd which companies are certied, the QA Register, a UK database of qualityassessed rms including more than 100 accreditation bodies, was used. This has the most complete available data for more than 100,000 organizations certied for their quality and environmental management strategies. The register includes only companies that have been provided with certications by the United Kingdom Accreditation Service (UKAS). The remaining indices have different standards and measurements. As discussed above, CSR is vital to external reporting of a rms strategy, plans and actions on the environment. It is considered as part of an ecoefcient business strategy by many analysts and researchers such as Holland (2003), Brady et al. (1999), Sinclair and Walton (2003) and Sinkin et al. (2008). CSR is used by organizations as one of the indices to report their steps. From the research into each ISO 14001 certied company, all of them were found to have published a CSR or sustainability report for ve or more years (websiteannual reports). Therefore, our rst denition of EE is ISO 14001 and CSR, and we therefore test 63 ecoefcient rms (Marshall and Brown, 2003; Holland, 2003; Sinkin et al., 2008). We add two more indicators to further increase the sample. BiE and FTSE4Good are used as environmental benchmarks. BiE ranks companies according to their management and performance scores based on surveys and questionnaires. There are 70 rms ranked in the BiE list, and 60 in the FTSE4Good directory for a minimum of 5 years. Since its launch in 2001 FTSE4Good has had its own ranking of organizations corporate responsibility. In addition, BiE also has a CSR index, which runs from 2002 onwards. Nevertheless, our second denition of EE is that companies must have featured in two indices for ve or more years during 19992008. As some of the companies featured only in BiE or only in FTSE4Good, the sample is reduced to 31 rms. Our nal denition combines the previous two denitions, i.e. rms that have ISO 14001 and a CSR report and/or participate in the BiE and FTSE4Good indices, leaving us with 94 ecoefcient rms.

Methodology
In the measurement of nancial performance, some studies use abnormal returns (Hamilton, 1995; Blacconiere and Northcut, 1997; Klassen and McLaughlin, 1996) or Tobins Q (Dowell et al., 2000; Konar and Cohen, 1997). Another group (King and Lenox, 2002) uses accounting measures such as return on assets (ROA) or return on equity (ROE) as well as Tobins Q. This research, following Sinkin et al. (2008), uses BV, EPS, leverage, market price and research and development (R&D) variables (Guenster et al., 2006; Pogutz and Russo, 2009). We add rm size as the natural log of a rms total assets, to control for any inuence on environmental strategy and performance (Guenster et al., 2006; King and Lenox, 2002; Pogutz and Russo, 2009). Another variable added is return on assets (ROA), in order to measure nancial performance for a particular time period (Hart and Ahuja, 1996; Pogutz and Russo, 2009).
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The study follows the Ohlson (1995) and Sinkin et al. (2008) model to test the effect of EE on rm value. We conduct the following regression: P it aIBVit a2EPSit I(EEit) 2(LEVit) 3(FIRMSIZEit) 4(ROAit) 5(R &Dit) it where: Pit = share/stock price of rm i at date t, 0 = constant variable, BVit = book value of equity per share at time t, EE = ecoefciency indicator, EPSit = earnings per share for period (t 1, t). LEVit = total debt to total assets ratio, FIRMSIZE = rm size, measured by the natural logarithm of total assets, ROA = return on assets (net income to total assets ratio), R&D = research and development expenditures (natural logarithm of research and development expenditures). We reestimate the models controlling for year effects to control for any economic factor across the years; all the models use clustered error terms to consider the group effects of the panel data. (1)

Empirical Analysis
We follow the Sinkin et al. (2008) approach by estimating Equation (1) without research and development and rm size. Table 2 shows the results of our model, for our rst denition of EE (ISO 14001 and CSR). There is a positive relationship between EE and rm value, suggesting that UK rms that adopt ecoefcient strategies have higher rm value than rms that do not adopt ecoefcient strategies. After we control for the year dummies, the EE coefcient remains positive and signicant. We also nd support for a positive signicant relationship between ecoefcient rms and rm value when we dene EE as rms that participate in BiE and FTSE4Good indices, suggesting that rms that participate in such indices have higher values than those that do not. This result remains unchanged when we control for the year dummies. In order to gain more understanding of the relationship between EE and rm value, we combined the two denitions into one. Here, EE is dened as rms with ISO 14001, which have CSR, and participate in BiE and FTSE4Good indices. We detect a positive signicant relationship between EE and rm value, and in turn we argue that rms with ecoefcient strategies outperform their counterparts without such strategies. These ndings are consistent with Sinkin et al. (2008) who posit a positive relationship between EE and rm value for a sample of US rms. In engaging in ecoefcient activities, rms are required to devise new business strategies to adhere to an ecoefcient environment. In so doing, such rms are in a position to operate within environmental

EPS EPS BV EE LEV FIRMSIZE ROA LOGRD 1 0.6239 0.1136 0.1061 0.327 0.433 0.0914

BV

EE

LEV

FIRMSIZE

ROA

LOGRD

1 0.0953 0.0156 0.4287 0.0231 0.0762

1 0.1711 0.517 0.0484 0.2392

1 0.2462 0.1807 0.1413

1 0.1248 0.4851

1 0.0569

Table 2. Correlation matrix Variables are dened in Table 1.

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norms which will have consequent benets in enhancing rm value. Among the control variables, we can deduce that the coefcient of EPS is positive and signicant for all the sample rms (EE1, EE2 and EE3). This shows that high EPS has a a positive inuence on rm value for UK rms. Similarly, we denote that highgrowth rms are likely to enhance ecoefcient rms. However, concerning leverage, we nd no evidence that it inuences the value of rms. Table 3 shows the results of our model in Equation (1). The results are similar to those reported in Table 4. The one exception is the EE coefcient: when it is dened as rms that participate in BiE and FTSE4Good indices it is
EE1 Model 1 Coeff. CONS EPS BV EE LEV YEAR R2 Number of obs. 2.555*** 2.925*** 0.666*** 0.829* 0.474 Yes 0.511 2008 SE Model 2 Coeff. SE Model 3 Coeff. SE EE2 Model 4 Coeff. SE Model 5 Coeff. SE EE3 Model 6 Coeff. SE 0.356 0.590 0.145 0.395 0.955

0.606 2.551*** 0.607 3.177*** 0.150 0.658*** 0.464 0.817* 0.996 0.404 No 0.497 2008

0.403 2.694*** 0.609 2.961*** 0.153 0.647*** 0.456 1.298* 0.985 0.598 Yes 0.513 2008

0.552 2.665*** 0.607 3.211*** 0.145 0.640*** 0.729 1.281* 1.013 0.523 No 0.499 2008

0.346 2.243*** 0.609 2.883*** 0.148 0.663*** 0.716 1.402*** 0.999 0.800 Yes 0.522 2008

0.558 2.235*** 0.586 3.137*** 0.141 0.656*** 0.400 1.382*** 0.965 0.722 No 0.508 2008

Table 3. Regression analysis Variables are dened in Table 1. EE1, rms that have ISO and Corporate Social Responsibility (CSR) reporting; EE2, rms that participate in Business in the Environment (BiE) and FTSE4Good indices; EE3, rms that have ISO and CSR reporting and/or participate in BiE and FTSE4Good indices. ***, **, * Indicate signicance at 1%, 5%, and 10%, respectively. EE1 Model 1 Coeff. CONS 3.241 EPS 4.399** BV 1.245*** EE 1.065* LEV 0.928 FIRMSIZE 0.673 ROA 0.012 LOGRD 0.809*** YEAR Yes R2 0.637 Number 687.000 of obs. SE Model 2 Coeff. SE Model 3 Coeff. SE EE2 Model 4 Coeff. SE Model 5 Coeff. SE 2.610 1.956 0.332 0.496 1.430 0.444 0.025 0.235 EE3 Model 6 Coeff. 1.566 4.558** 1.214*** 1.070** 0.840 0.783* 0.015 0.791*** No 0.625 687.000 SE 2.469 1.959 0.335 0.498 1.408 0.443 0.026 0.233

2.758 2.337 1.945 4.546** 0.332 1.221*** 0.637 1.068* 1.411 0.834 0.389 0.656* 0.025 0.017 0.241 0.802*** No 0.626 687.000

2.579 4.518 1.946 4.435** 0.334 1.201*** 0.627 0.567 1.390 1.042 0.387 0.350 0.027 0.012 0.239 0.795*** Yes 0.631 687.000

2.776 3.553 2.661 2.478 1.971 4.576** 1.971 4.408** 0.316 1.177*** 0.319 1.237*** 1.185 0.527 1.170 1.044** 1.484 0.942 1.462 0.932 0.464 0.338 0.462 0.793 0.025 0.017 0.027 0.010 0.238 0.787*** 0.236 0.799*** No Yes 0.620 0.635 687.000 687.000

Table 4. Regression analysis full model Variables are dened in Table 1. EE1, rms that have ISO and Corporate Social Responsibility (CSR) reporting; EE2, rms that participate in Business in the Environment (BiE) and FTSE4Good indices; EE3, rms that have ISO and CSR reporting and/or participate in BiE and FTSE4Good indices. ***, **, * indicates signicance at 1%, 5%, and 10%, respectively.
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not signicant, suggesting that there is no substantial difference between rm values if rms participate in these indices or not. The results remain unchanged when we control for the year dummies. There is a limited negative relationship between rm size and rm value. This could be explained by the fact that small rms might have higher value than large ones, which can be related to relative risk. Also, we nd evidence of a positive relationship between research and development expenditure and rm value, suggesting that rms that spend more in R&D have more value. Our result is consistent with Dowell et al. (2000), Ballou et al. (2003) who report that R&D intensity is positively related to rm value. Sinkin et al. (2008), however, report a positive but insignicant relationship between R&D and rm value. Finally, there is no signicant relationship between leverage and protability on the one hand, and rm value on the other. We reestimate the models in Table 2 using the robust regression and the results are not substantially different from those reported above. The EE coefcient remains positive and signicant for all the models we test.

Conclusion
Earlier researchers found a positive relationship between environmental and nancial performance (Anderson and Frankle, 1980; Belkaoui, 1976, Guenster et al., 2006). However, only a few studies concentrate on the EE concept that supports the creation of an actual value factor for a rm which is consistent with the reduction of impact on the environment (Sinkin et al., 2008). Burritt and Saka (2006) examine the Japanese market and detect that the association between environmental management accounting and EE is incomplete and further action towards sustainability improvement is suggested. In a portfolio study conducted by Derwall et al. (2005), ecoefcient rms attain greater portfolio returns in contrast with their nonecoefcient counterparts. In addition, according to Guenster et al. (2006), ecoefcient rms have higher market value relative to other rms. A similar conclusion is also reached by Sinkin et al. (2008), who investigate the US market with regard to EE and rm value. This paper applies Ohlsons (1995) model and adopts a modied version of the methodology of Sinkin et al. (2008). The main outcome indicates a strong positive relationship between the market price and the EE variable. Thus, market price is highly affected by the EE term. Furthermore, the study empirically examines whether EE criteria can result in different outcomes by dening and separating EE into two samples. As a result, companies that have ISO 14001 certication and publish a CSR report show greater value than rms that participate in two indices for a minimum of 5 years. Our ndings have implications for both managers and investors. The acceptance of the relationship between EE and rm value provides evidence to investors that ecoefcient corporations can generate higher future returns. Moreover, internal managers may note that such an investment is not in conict with a rms primary nancial aims but can be viewed as a competitive advantage (Porter and Van Der Linde, 1995). Further, our results support the argument of Meijkamp (1998) that the use of ecoefcient services induces a positive impact on rms and as a result leads to reduced harmful effects on the environment. Moreover, such eco efcient services can also inuence consumer behavior in a positive way by being ecofriendly, and hence enhancing rms sales. Nowadays, business process management has become a core area among rms. Therefore, adopting ISO 14001 will be benecial for rms to operate at a fast pace and with great effectiveness. Moreover, aligning environmental standards with a rms business process is one of the main business strategies of rms engaged in environmental strategies. In so doing, such rms are in a position to enhance efciency and effectiveness as their processes operate in line with changing environmental conditions. As mentioned earlier, by optimizing their systems, businesses will save time, costs and reduce risk and therefore increase rm value. A number of proposals and related plans and actions have been suggested to address the discrepancies and difculties involved in measurement of EE. This study can be seen as a rst attempt to address the issue and leaves plenty of room for further examination and discussion. Future research is encouraged, concentrating on more specic EE measures.
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B. AlNajjar and A. Anfimiadou

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Bus. Strat. Env. 21, 4959 (2012) DOI: 10.1002/bse