E C O L O G I C A L E C O N O M I C S 6 7 ( 2 0 0 8 ) 4 6 5 – 4 7 2

ava i l ab l e a t www.sc i enced i rec t . com

www.e l sev i e r. com/ l oca te /eco l econ

ANALYSIS

A change in market responses to the environmentalmanagement ranking in Japan

Fumiko Takeda⁎, Takanori Tomozawa⁎

Department of Technology Management for Innovation, University of Tokyo, 7-3-1, Hongo, Bunkyo-ku, Tokyo, 113-8656 Japan

A R T I C L E I N F O

⁎ Corresponding authors. Tel./fax: +81 3 5841E-mail address: takeda@tmi.t.u-tokyo.ac.jp

1 In their seminal paper, Porter and van dthat environmental regulations could genemight offset costs incurred by them.2 Many existing research papers on corpo

bility (CSR) have support the idea that Cconsumers’ brand and product evaluationsconsiderations (Maignan, 2001; Mohr et al., 2

0921-8009/$ – see front matter © 2008 Elsevidoi:10.1016/j.ecolecon.2007.12.027

A B S T R A C T

Article history:Received 27 February 2007Received in revised form18 November 2007Accepted 28 December 2007Available online 8 April 2008

This article investigates stock price reactions to the release of the environmentalmanagement ranking issued by Nihon Keizai Shimbun (Nikkei newspaper) from 1998 to2005, by using a standard event study methodology. An examination of stock pricemovements of the top 100 manufacturing companies reveals that stock prices during thesample period did not respond significantly to the release of the ranking within a 3-dayevent window. However, market responses became significantly positive after 2003, whilethey were significantly negative in 1999 and 2000. The stock prices of upgraded companiesin particular reacted negatively before 2000, but positively after 2002. These results indicatethatmarket reactions were changed between 2001 and 2002, when the Japanese governmentshowed its strong commitment to environmental policies by establishing theMinistry of theEnvironment and signing the Kyoto Protocol, following a number of legislations.

© 2008 Elsevier B.V. All rights reserved.

Keywords:Environmental managementEvent studyValuationCorporate social responsibility

1. Introduction

Views on the relationship between environmental and cor-porate performance have changed remarkably in recent years.Traditional views are based on a tradeoff between socialbenefits and private costs, insisting that society should enjoybenefits from environmental protection, which imposesadditional economic burdens on private companies. In con-trast, several economists state that firms can benefit fromenvironmental management, even though it entails addi-tional costs, since environmental management enables firmsto generate innovation,1 improve the firms' reputation,2

1191.(F. Takeda).e Linde (1995) claimrate innovation that

rate social responsi-SR positively affectsmore than economic001).

er B.V. All rights reserved

charge higher prices for their products, recruit highly skilledworkers, etc.

On the back of these developments, a number of empiricalstudies focus on the relationship between environmental andfinancial performance.3 Most of the existing studies find thatstock markets react positively to environmentally friendlynews and negatively to environmentally unfriendly news. Inparticular, earlier studies examine the effect of pollutionnews, which is negative to the environment, on stockmarkets.For example, Blacconiere and Patten (1994) show that the 1986chemical leak at Union Carbide's plant pulls down not only itsstock price but also that of 47 other chemical firms. Hamilton(1995) and Konar and Cohen (1997) find that stock marketsreact negatively to the first edition of Toxic Release Inventory(TRI) data released by the Economic Planning Agency (EPA) inJune 1989. Similarly, Khanna et al. (1998) provide evidence thatrepeated annual release of TRI data is negatively affectedstock prices during the years 1990–1994.

3 For detailed surveys of the relevant literature, see Koehler (2003).

.

466 E C O L O G I C A L E C O N O M I C S 6 7 ( 2 0 0 8 ) 4 6 5 – 4 7 2

The positive correlation between environmental and fi-nancial performance is not limited to the developed countries,but also appears in the emerging countries. For instance,Dasgupta and Laplante (2001) show that stock markets ofArgentina, Chile, Mexico, and the Philippines negativelyreact to news of citizen's complaints, but positively to theannouncements of superior environmental performance ofcompanies. Focusing on Argentina, Grand and D'Elia (2005)find that stock prices drop after the release of negative news,while they do not significantly react to positive news.

In addition, several papers investigate how stock marketsreact to announcements of environmental ratings. For exam-ple, Yamashita et al. (1999) find only a weak increase in thestock prices of firms with high environmental conscientious-ness (EC) scores, which are published in Fortune magazine(1993). In the case of India, Gupta and Goldar (2005) provideevidence that the stock prices of pulp and paper, automobiles,and chlor alkali companies tend to decrease following theannouncements of poor environmental performance based onthe “green leaf rating,” the environmental rating assigned bythe Center for Science and Environment, India's environmen-tal NGO. They also find a positive correlation between firm'sstock price and its environmental performance.

Although these existing studies report that stock marketsreact positively to environmentally friendly news and nega-tively to environmentally unfriendly news, our previousresearch shows that this does not hold for the Japanese case.Nagayama and Takeda (2007) show that environmentallyfriendly news generally did not affect stock prices significantlyfrom 1997 to 2004, and Takeda and Tomozawa (2006) find thatstock prices of the top 30 manufacturing companies in theNikkei Environmental Management Ranking did not respondsignificantly to the release of the ranking between 1998 and2005.

The present study extends Takeda and Tomozawa (2006)by adding the 31st–100th ranked manufacturing companies tothe sample. An examination of stock price movements of thetop 100 manufacturing companies reveals that stock pricesfrom 1998 to 2005 did not respond significantly to the releaseof the ranking within a 3-day event window. However, marketresponses became significantly positive after 2003, while theywere significantly negative in 1999 and 2000. The stock pricesof upgraded companies in particular reacted negatively before2000, but positively after 2002. These results indicate thatmarket reactions changed between 2001 and 2002, when the

Table 1 – The number of respondents

Year # of respondents # of manufacturing (a)/(b)

(a) (b)

1998 657 1307 50.3%1999 875 1992 43.9%2000 791 2008 39.4%2001 820 2040 40.2%2002 703 2047 34.3%2003 599 1772 33.8%2004 590 1778 33.2%2005 558 1747 31.9%

Source: Nikkei newspaper.

Japanese government showed its strong commitment toenvironmental policies by establishing the Ministry of theEnvironment and signing the Kyoto Protocol, following anumber of legislations. We also find that stock market re-actions were significantly positive during the period between2003 and 2005 for electronics, food, chemical and automobileindustries, which were subject to industry-specific environ-mental laws and regulations and/or had large amounts of CO2

emissions.The rest of the article is organized as follows. Sections 2

and 3 explain the data and the standard event study meth-odology, respectively. Section 4 describes the hypotheses test-ed for the present analyses. Section 5 discusses the results,and concluding remarks are provided in Section 6.

2. Data

The present study is based on the Nikkei EnvironmentalManagement Ranking, which has been conducted andreleased by the Nikkei newspaper every December since1997. This ranking shows Nikkei's evaluation of differentfirms' environmental management based on principal com-ponent analyses of their answers to questions sent by Nikkei.The questions used in 2004 and 2005, for example, wereclassified into the following seven categories: (1) managementsystems, (2) long-term goals, (3) anti-pollution measures, (4)recycling, (5) environmentally friendly products, (6) reductionof greenhouse gas emissions, and (7) offices. Since the specificcomponents of the questions vary by year, the present studyfocuses on total scores.

Based on the Nikkei Environmental Management Ranking,daily stock returns are calculated for listed manufacturingcompanies, which are ranked above 100 from 1998 to 2005,4

and for the index Tokyo Stock Price Index (TOPIX hereafter),5

by using Toyo Keizai's Kabuka CD-ROM 2002 and 2006:

Rit ¼Pit � Pit�1

Pit�1; andRmt ¼ Tt � Tt�1

Tt�1; ð1Þ

where Pit presents the stock price of the ith firm at time t, Rit isits rate of return, Tt refers to TOPIX at time t, and Rmt is its rateof return.

Table 1 shows the number of respondents to the questionssent by the Nikkei. Although the number varies from year toyear, on average, 700 firms answered the questions. This im-plies that on average, 600 firms, which are not included in oursample, had an environmental management system whoserank was lower than the top 100 companies. Table 1 alsoshows that more than half of the manufacturing companies

4 The 1997 survey results are unpublished.5 TOPIX is a stock market index based on market capitalization

of all (floating after 2005) stocks listed on the First Section of theTokyo Stock Exchange. Another representative stock price indexin Japan is Nikkei 225, which is a sum of stock prices of 225companies listed on the First Section of the Tokyo Stock Exchangedivided by the number of issuers. Since Nikkei 225 includes only225 companies, it can be affected by changes of stock prices ofspecific industries. Thus, most empirical studies employ TOPIX asa market index in Japan.

Table 2 – Distribution by industry

Industry 1998 1999 2000 2001 2002 2003 2004 2005 1998–2005 Weight (%)

Electronics 26 30 28 25 29 33 35 41 247 38.2Precision Instruments 0 2 3 2 3 2 1 0 13 2.0Automobiles 13 7 15 15 13 14 13 11 101 15.6Printing and office equipment 3 3 3 2 4 4 4 3 26 4.0Paper and pulp 3 2 1 2 1 1 2 3 15 2.3Textiles 2 2 2 2 2 0 0 0 10 1.5Foods 5 4 4 3 3 5 3 4 31 4.8Chemicals 18 10 7 8 4 9 8 8 72 11.1Machinery 5 4 6 4 6 5 8 7 45 7.0Rubber products 1 3 2 1 2 3 3 4 19 2.9Pharmaceuticals 3 2 3 1 1 2 2 1 15 2.3Iron and steel 2 5 2 4 3 3 2 4 25 3.9Nonferrous metals 1 4 1 1 2 3 3 4 19 2.9Fabricated metal products 0 1 0 0 0 0 0 1 2 0.3Stone and glass 1 1 0 3 0 0 0 1 6 0.9

Total 83 80 77 73 73 84 84 92 646 100.0

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did not answer the questions. This may indicate the possibi-lity that some companies, which had a good environmentalmanagement system, did not answer the questions and notappear in the ranking. However, Japan's major manufacturingcompanies were included in the ranking. Also, what we testhere is whether the release of the ranking provided additional(good or bad) news to the market. Thus, the possibility thatcompanies with good environmental management systemmight not have been included in the top 100 companies doesnot matter so much for our research purpose.

Table 2 presents the distribution of our sample by industry.Since unlisted companies and non-manufacturing companiesare deleted from the sample, the total number of observationsis 646. Electronics, automobiles, and chemical industries arethree industries that appear frequently in the top 100companies during the period between 1998 and 2005. In gen-eral, these industries are known for their environmentallyfriendly activities.

3. Methodology

In order to evaluate the effects of announcements of theNikkei Environmental Management Ranking on stock pricesof ranked firms, the standard event study methodology isemployed, as described by MacKinlay (1997). This methodol-ogy assumes that markets are efficient in a semi-strong form.In other words, current stock prices reflect all publicly avail-able information, and fluctuate only by unexpected events,which influence the future profitability of a firm. Thus, therelease of the environmental management ranking is likely tomove stock prices as long as the ranking is unexpected byinvestors.

The advantage of event studies lies in the fact that themagnitude of abnormal returns at the time of the releasereflects the change of the investors' expectation on the firms'future cash flows. A simple regression to estimate the rela-tionship between the ranking and the stock prices may notenable us to separate the impact of the ranking on the stockprices from other news that may have caused stock pricefluctuations during the sample period. Calculating abnormal

returns provides us more precise way to measure the impactof the release of the ranking.

The event in this study is defined as the date when theNikkei EnvironmentalManagement Ranking is announced. Anevent window is chosen for 3 days, which include 1 day beforeand after the event day. The event day is defined as t0, theinitial date of the event window as t1=−1, and the final date ofthe event window as t2=+1. The estimation window is set at150 transaction days before the event window.

Then the following market model proposed by MacKinlay(1997) is estimated for each announcement:

Rit ¼ ai þ biRmt þ eit; ð2Þ

where εit presents the zero mean disturbance term. Based onthe estimated parameters αi and β i, the abnormal return forthe stock of firm i in period t is computed by:

ARit ¼ Rit � ai þ biRmt

� �: ð3Þ

The cumulative abnormal return (CAR) is obtained by sum-ming up abnormal returns over the event window:

CARi t1; t2ð Þ ¼Xt2t¼t1

ARit: ð4Þ

Averaging the CAR and its variance σi2(t1, t2) across N firms

in the same category gives the average cumulative abnormalreturn (

PCAR) and its variance σi

−2(t1, t2):

PCAR t1; t2ð Þ ¼ 1=N

XN

i¼1

CARi t1; t2ð Þ;

VARPCAR t1; t2ð Þ

h i¼ rP2 t1; t2ð Þ ¼ 1=N2

XN

i¼1

r2i t1; t2ð Þ:ð5Þ

Assuming that each event does not affect the mean orvariance of returns, we can test whether the average CAR isequivalent to zero, by using the following J-statistic:

J ¼PCAR t1; t2ð ÞffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffirP2 t1; t2ð Þ

q fN 0;1ð Þ: ð6Þ

Fig. 1 – Thenumberofnews itemsoncorporateenvironmentalmeasures.Note: Thenumberofnews items is collected byusingNikkei Telecom, which covers four newspapers related toNikkei. Source: Nagayama and Takeda (2007).

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4. Hypotheses

The present analysis examines 5 different hypotheses. Asmentioned above, modern firms are expected to benefit fromengaging in environmental management by generating inno-vation, improving their reputation, allowing them to chargehigher prices for their products, permitting the recruitment ofhighly skilled workers, etc. In this sense, the release of theEnvironmental Management Ranking is considered to bepositive news for the top 100 companies. Thus, Hypothesis 1is tested first.

Hypothesis 1. The release of the Environmental ManagementRanking increases the stock prices of the top 100 firms on thewhole.

Next, in order to examine what conditions enhance theeffect of the rankings, estimated CARs are classified into fivecategories: year, change in rating, level of rating, industry anditems. With respect to year effects, theoretical considerationssuggest that CARs may have become larger in earlier yearsthan in recent years. If markets are efficient, repeatedannouncements of a similar ranking may decrease the valueof the information. However, we expect average CARs increasein the later years of the sample period based on the followingthree reasons.

First, after the government signed the Kyoto Protocol,probability that firms without efforts to reduce greenhousegas (GHG) would pay the penalty or damage the reputationin the future increased remarkably than before. Theoretical-ly, stock prices reflect the firms' future cash flows expectedby investors. The government's commitment to the KyotoProtocol means that environmentally unfriendly manage-mentmay becomemore costly for firms than environmentallyfriendly management.

Second, as more and more households become aware ofthe importance of environmental management, firms mayincrease future cash flows, by improving firms' reputation,charging higher prices for their products, and recruiting highlyskilled workers as discussed before. Fig. 1 shows that thenumber of newspaper articles on corporate environmentalmeasures increased sharply after 2000. This rapid increasemay have contributed households' awareness of the impor-tance of environmental management.

Third, as firms and households become aware of the im-portance of environmental management, it is reasonable toconjecture that more and more investors also regard envi-ronmental management as a positive factor to firms' futurecash flows than before. As long as the release of the ranking isunexpected by investors, positive effects of the ranking onfirms' future cash flows and then stock prices are expected torise in the later period.

Hypothesis 2. Thedegreeof the increase instockpricesbecomesgreater in more recent years.

Standard event study methodology assumes that onlyunexpected news can change stock prices, by updating thefuture profits of firms. Thus, rational investors are assumed tofavorably evaluate firms that have been upgraded from theirprevious ranking. Additionally, firms that are downgraded

from the previous ranking are likely to fall short of investors'expectations. Also, firms whose ranking is unchanged areunlikely to experience any significant change in their stockprices.

Hypothesis 3. Stock prices of upgraded firms react positivelyto the announcement of new rankings, while those of down-graded firms react negatively.

Firms with higher rankings are assumed to be better knownby investors for their efforts in environmental managementthan firms with lower rankings. Thus, among the top 100companies, market reactions to announcements are expectedto be greater for lower-ranked firms than for higher-rankedfirms, since the appearance of lower-ranked firms are morenews than the appearance in higher-ranked firms for investors.

Hypothesis 4. Stock prices of lower-ranked firms react moresignificantly to the announcement of new rankings than thoseof higher-ranked firms.

Finally, firms' efforts to engage in environmental manage-ment may vary across industries. For instance, some indus-tries, such as the iron and steel, and chemical industries, areknown for their huge CO2 emissions and are likely to engageseriously in environmentalmanagement. Also, some firms aresubject to industry-specific environmental regulations, aspresented in Table 3, and may make substantial efforts toconduct environmentally friendly management to satisfy theregulations.

Table 3 presents laws and regulations related to electronicsindustry, food industry, automobile industry, and chemicalindustry, which were enacted or revised around 2000. Specif-ically, the Home Appliances Recycling Law forced electron-ics companies to establish recycling plants, waste-collectingcenters and other necessary facilities, and instigated recyclingcharges in order to recycle television sets, refrigerators, air-conditioners and washing machines. Likewise, the revisedContainers and Packaging Recycling Law required foodcompanies to recycle glass and polyethylene terephthalate(PET) bottles, and automobile industries must obey the Auto-mobile Recycling Law, by designing more easily removable

Table 3 –Major environmental legislations around 2000

Month/year Name of the law

Enacted in June 2000 Fundamental law for establishing a sound Material-cycle societyPromulgated in April 1991,and revised in Nov. 1993,Dec. 1999, June 2000.

Law for promotion of effective utilization of resources (Recycling law)

Enacted in 1997, and fullyenforced in April 2000

Law for promotion of sorted collection and recycling of containers and packaging (Containers and packagingrecycling law)

Enacted in June 2000, andenforced in March 2001

Law concerning the promotion of recycling food cyclical resources (Food recycling law)

Enacted in June 1998, andenforced in April 2001

Law for the recycling of specified kinds of home appliances (Home appliances recycling law)

Enacted in May 2000 Law concerning recycling of materials from construction work (Construction materials recycling law)Revised in June 2002 Law concerning the rational use of energyEnacted in July 2002 Automobile recycling lawEnacted in July 1999 Law concerning reporting, etc. of releases to the environment of specific chemical substances and promoting

improvements in their managementEnacted in May 2002 Soil contamination countermeasures law

Source: The Ministry of Environment and the Ministry of Economy, Trade, and Industry.

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bumpers and panels, and more easily repairable automobiles.The chemical industry has also been affected by the establish-ment of the Law concerning Reporting, etc. of Releases to theEnvironment of Specific Chemical Substances and the Pro-moting Improvements in TheirManagement, and the Soil Con-tamination Countermeasures Law.

For these industries, the effect of the release of the envi-ronmental management is considered to bemore significantlythan other industries. Thus, Hypothesis 5 is tested.

Hypothesis 5. Stock market reactions to the announcementof new rankings are more significant for the industries thathave large emissions of pollutants and/or that are subject toindustry-specific environmental laws and regulations.

5. Discussion

Table 4 presents the average CARs and their statisticalsignificance for each year. The average CAR of all samples

Table 4 – Average CARs by year

Year All firms Up

# of firms CAR J-statistic # of firms

1998 83 −0.002 −0.610 551999 80 −0.021 −6.875⁎⁎⁎ 472000 77 −0.005 −1.940⁎ 512001 73 0.003 1.072 452002 73 −0.001 −0.326 472003 84 0.008 3.747⁎⁎⁎ 542004 84 0.007 4.469⁎⁎⁎ 482005 92 0.011 7.134⁎⁎⁎ 56

1998–2000 240 −0.009 −5.722⁎⁎⁎ 1532001–2002 146 0.001 0.600 922003–2005 260 0.009 8.564⁎⁎⁎ 158

1998–2001 313 −0.006 −4.548⁎⁎⁎ 1982002–2005 333 0.007 6.935⁎⁎⁎ 205

1998–2005 646 0.000 0.400 403

Note: ⁎⁎⁎, ⁎⁎, and ⁎ indicate statistical significance at 1%, 5%, and 10%, resp

is positive, but statistically insignificant. This result doesnot provide support for Hypothesis 1, but is consistent withTakeda and Tomozawa (2006) and Nagayama and Takeda(2007). Thus, during the sample period, Japanese investors didnot seem to take the firms' environmental performance intoaccount, unlike the US and European investors that were ex-amined in the previous literature.

However, taken year by year, the average CARs of 1999 and2000 are significantly negative, while those between 2003 and2005 are significantly positive. This result is consistent withHypothesis 2. It is noteworthy that the average CARs increaseduring 2003 and 2005, indicating that the positive influence onstock prices have increased in more recent years. This resultindicates that some fundamental changes may have occurredbetween 2001 and 2002, which then affected the investors'perceptions of environmental management.

It is true that 2001 and 2002 were very important years forthe Japanese government with respect to the environmentalmanagement, because the Japanese government showed its

graded firms Downgraded firms

CAR J-statistic # of firms CAR J-statistic

−0.003 −1.098 28 0.002 0.536−0.033 −8.170⁎⁎⁎ 32 −0.004 −0.933−0.010 −2.856⁎⁎⁎ 24 0.005 1.097−0.002 −0.645 25 0.014 2.929⁎⁎⁎0.004 1.379 26 −0.010 −2.560⁎⁎0.010 3.742⁎⁎⁎ 30 0.005 1.2610.003 1.310 36 0.010 4.095⁎⁎⁎0.011 5.417⁎⁎⁎ 35 0.012 5.040⁎⁎⁎

−0.015 −7.171⁎⁎⁎ 84 0.001 0.2230.001 0.422 51 0.002 0.5290.008 6.153⁎⁎⁎ 101 0.009 5.578⁎⁎⁎

−0.012 −6.578⁎⁎⁎ 109 0.004 1.5580.007 5.844⁎⁎⁎ 127 0.005 3.382⁎⁎⁎

−0.002 −1.932⁎ 236 0.004 3.292⁎⁎⁎

ectively.

Table 5 – Average CARs by rank

Year 1st–30th rank 31st–100th rank

# offirms

CAR J-statistic

# offirms

CAR J-statistic

1998 25 −0.002 −0.415 58 −0.001 −0.4631999 25 −0.008 −1.617 55 −0.027 −7.078⁎⁎⁎2000 24 0.003 0.755 53 −0.010 −2.677⁎⁎⁎2001 24 0.000 0.056 49 0.004 1.2392002 20 −0.008 −1.799⁎ 53 0.002 0.5862003 25 0.004 1.113 59 0.010 3.701⁎⁎⁎2004 24 0.010 3.474⁎⁎⁎ 60 0.006 3.132⁎⁎⁎2005 28 0.001 0.195 64 0.016 8.162⁎⁎⁎

1998–2000

74 −0.002 −0.846 166 −0.012 −6.160⁎⁎⁎

2001–2002

44 −0.003 −1.031 102 0.003 1.312

2003–2005

77 0.005 2.577⁎⁎ 183 0.011 8.434⁎⁎⁎

1998–2001

98 −0.002 −0.710 215 −0.008 −4.932⁎⁎⁎

2002–2005

97 0.002 1.256 236 0.009 7.279⁎⁎⁎

1998–2005

195 0.000 0.137 451 0.001 0.637

Note: ⁎⁎⁎, ⁎⁎, and ⁎ indicate statistical significance at 1%, 5%, and 10%,respectively.

Table 6 – Test results of the null hypothesis:―CARh =―CARi

PCARh

PCARl

t-statistic

1998–2005 0.0002 0.0004 −0.062

Fig. 2 – Average CARs by level of the ranking.

470 E C O L O G I C A L E C O N O M I C S 6 7 ( 2 0 0 8 ) 4 6 5 – 4 7 2

strong commitment to environmental policies by establishingthe Ministry of the Environment and signing the KyotoProtocol. The latter event meant that Japanese companieswere obliged to reduce CO2 emissions in order to avoid pen-alties after 2008. In order to promote environmentally friendlyactivities, the Fundamental Law for Establishing a SoundMaterial-Cycle Society was enacted in June 2000, followingrevisions of existing laws and the establishment of new laws,as described in Table 3. In addition, the “FTSE4Good” indexseries, SRI Index Funds, launched in 2001. In particular,“FTSE4GoodGlobal Index” includes many Japanese com-panies.6 The SRI Index Funds may render investors and man-agers more sensitive to environmental management.

With respect to the effect of a change in ranking, Table 4 alsopresents the average CARs of both upgraded and downgradedcompanies. Since thenumberof unchanged firms isquite small,the present analysis is limited to the average CARs of upgradedand downgraded firms. Table 4 shows that during the sampleperiod, the average CAR of upgraded companies is significantlynegative, while that of downgraded companies is significantlypositive. This result is not consistent with Hypothesis 3.

Year by year, the average CARs of upgraded companies aresignificantly negative in 1999 and 2000, and significantlypositive in 2003 and 2005. This trend is similar to that of allsamples, which indicates a change in the overall market per-ception of environmental management from costs to benefitsfor private companies. Likewise, the average CARs of down-graded companies are significantly positive in 2001, 2004 and2005, but significantly negative in 2002.

6 As of October 2003, 88 Japanese companies appeared in the“FTSE4GoodGlobal Index,” which includes 838 companies.

In sum, the stock prices of both upgraded and downgradedfirms tended to increase with the announcement of theranking after 2003, while those of upgraded firms decreasebefore 2000. This result shows that a change in ranking did notsignificantly affect investments after 2003. Indeed, it seems tobe more important for investors to buy stocks of companiesappear in the ranking, regardless of their specific rank.

Table 5 presents the average CARs of companies betweenthe 1st and the 30th rank and of companies between the 31stand the 100th rank. Note that, during the sample period, theaverage CARs of both groups of companies are positive butstatistically insignificant. This result is not consistent withHypothesis 4.

In year by year data, Table 5 shows that the average CARs ofcompanies between the 1st and the 30th rank are significantlynegative in 2002, and significantly positive in 2004, while theaverage CARs of companies between the 31st and the 100thrank are significantly positive between 2003 and 2005, butsignificantly negative in 1999 and 2000. This trend is alsosimilar to that of all samples.

Fig. 2 shows the movements of the average CARs of higher-ranked companies (1st to 30th rank), lower-ranked companies(31st to 100th rank), and all companies. Between 1998 and 2000,the averageCARs of lower-ranked companies are below thoseofhigher-ranked companies. In contrast, in all examined yearsafter 2001 except 2004, the average CARs of lower-rankedcompanies exceed those of higher-ranked companies. Con-sidering the fact that the positive influence on stock prices hasincreased in recent years, this result is consistent withHypothesis 4, indicating that lower-ranked firms can benefitsimply from being ranked, since appearance of lower-ranked

1998–2000 −0.0023 −0.0124 1.7562001–2002 −0.0033 0.0030 −1.1792003–2005 0.0046 0.0105 −2.028

Table 7 – Average CARs by industry

Industry All samples 1998–1999 2000–2001 2003–2005

# offirms

CAR J-statistic

# offirms

CAR J-statistic

# offirms

CAR J-statistic

# offirms

CAR J-statistic

Electronics 247 0.005 3.418⁎⁎⁎ 84 0.002 0.559 54 −0.005 −1.422 109 0.005 2.914⁎⁎⁎PrecisionInstruments

13 −0.007 −1.047 5 −0.014 −1.212 5 −0.011 −1.030 3 0.012 1.000

Automobiles 101 −0.002 −0.912 35 −0.006 −1.338 28 −0.007 −1.812⁎ 38 0.006 2.438⁎⁎Printing and officeequipment

26 0.002 0.453 9 −0.017 −2.290⁎⁎ 6 0.015 1.734⁎ 11 0.010 2.131⁎⁎

Paper and pulp 15 −0.002 −0.313 6 −0.010 −0.862 3 −0.006 −0.514 6 0.009 1.640Textiles 10 −0.003 −0.386 6 −0.011 −1.273 4 0.010 0.906 0 0.000 0.000Foods 31 −0.002 −0.651 13 −0.017 −3.108⁎⁎⁎ 6 0.012 1.910⁎ 12 0.008 2.635⁎⁎⁎Chemicals 72 0.004 1.492 35 −0.010 −2.397⁎⁎ 12 0.014 2.055⁎⁎ 25 0.018 5.832⁎⁎⁎Machinery 45 −0.003 −0.982 15 −0.022 −3.213⁎⁎⁎ 10 0.006 0.833 20 0.007 1.883⁎Rubber products 19 −0.031 −6.246⁎⁎⁎ 6 −0.112 −9.796⁎⁎⁎ 3 0.024 1.607 10 0.001 0.231Pharmaceuticals 15 0.001 0.256 8 0.001 0.066 2 0.002 0.128 5 0.002 0.353Iron and steel 25 −0.001 −0.196 9 −0.007 −0.845 7 0.021 2.147⁎⁎ 9 −0.012 −1.768⁎Nonferrousmetals

19 −0.008 −1.365 6 −0.037 −3.019⁎⁎⁎ 3 0.007 0.462 10 0.005 0.852

Fabricated metalproducts

2 −0.023 −1.206 1 −0.035 −0.964 0 0.000 0.000 1 −0.011 −1.010

Stone and glass 6 0.007 0.725 2 0.013 0.576 3 0.008 0.661 1 −0.007 −0.582

Total 646 −0.001 0.400 240 −0.009 −5.722⁎⁎⁎ 146 0.001 0.600 260 0.009 8.564⁎⁎⁎

Note: ⁎⁎⁎, ⁎⁎, and ⁎ indicate statistical significance at 1%, 5%, and 10%, respectively.

471E C O L O G I C A L E C O N O M I C S 6 7 ( 2 0 0 8 ) 4 6 5 – 4 7 2

firms may be more unexpected news for investors than that ofhigher-ranked firms.

More formally, denoting the average CARs of higher-rankedcompanies as

PCARh and the average CARs of lower-ranked

companies asPCAR l, we test the null hypothesis:

PCARl ¼

PCARh .

As shown in Table 6, the result of the tests based on the wholesample does not reject the null hypothesis. However, whenwedivide the sample into three periods, the null hypothesis isrejected at a 5% significance level during the period between1998 and 2000 against the alternative hypothesis:

PCARlb

PCARh .

Also the null hypothesis is rejected at a 5% significance levelduring the period between 2003 and 2005 against the alter-native hypothesis:

PCARlN

PCARh , while the null hypothesis is

not rejected during the period between 2001 and 2002. Thus,our results are consistent with Hypothesis 4.

With respect to the effect of specific industries, Table 7gives the average CARs by industry, showing that they varyacross industries, as suggested by Hypothesis 5. During thesample period, only the electronics industry shows signifi-cantly positive CARs, while rubber products have significantlynegative CARs.

In the present year-by-year analysis, industry effects alsoshowachangearound2000.Between1998and1999, theaverageCARs of companies producing printing and office equipment,foods, chemicals, machinery, rubber products and nonferrousmetals are significantly negative. In contrast, between 2003 and2005, the average CARs of companies producing electronics,automobiles, printing and office equipment, textiles, foods,chemicals, and machinery are significantly positive, althoughthe results for printing and office equipment and foodsindustries may not be robust, considering the fact that thesample sizes of these industries are small. In particular, theaverage CARs of electronics, foods, and chemical industries are

significant at a 1% level, and those of automobiles and printingand office equipments are significant at a 5% level.

Overall, these results are consistent with Hypothesis 5, par-ticularly during the period 2003–2005. As presented in Table 3,electronics, foods, chemical and automobile industries are sub-ject to environmental laws and regulations, which are enactedand/or enforced around 2000. Also, chemical industry emits thesecond largest amounts of emissions of CO2 in Japan. Thus, theannouncement that these industries are included among top100 companies in the EnvironmentalManagement Rankingwaspositive news to investors. The exception is iron and steel in-dustry, which emits the largest amounts of CO2 among man-ufacturing industries. The average CAR for iron and steelindustry is significantly positive at a 5% level during the periodbetween 2000 and2001,while it is significantlynegative at a 10%level during the period between 2003 and 2005. However,considering that the sample size of iron and steel industry isquite small and that its significance level of the average CARduring 2003–2005 is only 10% level, our results of iron and steelindustry may not be so robust. Thus, in order to obtain moreconclusive decision, further research should be needed toanalyze the effects of emissions of pollutants and the environ-mental laws and regulations on stock prices.

6. Concluding remarks

This article investigated stock price reactions to the release oftheenvironmentalmanagement ranking issuedbyNihonKeizaiShimbun (Nikkei newspaper) from 1998 to 2005, by using astandard event study methodology. An examination of stockprice movements of the top 100 manufacturing companiesrevealed that stock prices during the sample period did not

472 E C O L O G I C A L E C O N O M I C S 6 7 ( 2 0 0 8 ) 4 6 5 – 4 7 2

respond significantly to the release of the ranking within athree-day event window. However, market responses becamesignificantly positive after 2003, while they were significantlynegative in 1999 and 2000. The stock prices of upgraded com-panies in particular reacted negatively before 2000, but posi-tively after 2002. These results indicate that market reactionswere changed between 2001 and 2002, when the Japanese gov-ernment showed its strong commitment to environmental pol-icies by establishing the Ministry of the Environment andsigning the Kyoto Protocol, following a number of legislations.

We also found that stock market reactions were signifi-cantly positive during the period 2003–2005 for electronics,foods, chemicals and automobile industries, which were sub-ject to industry-specific environmental laws and regulationsand/or had large amounts of CO2 emissions. However, furtherresearch should be needed in order to obtain more conclusivedecision, to analyze the effects of emissions of pollutants andthe environmental laws and regulations on stock prices.

Acknowledgements

Wewould like to thank anonymous reviewers for helpful com-ments and suggestions. Fumiko Takeda gratefully acknowl-edges financial support from the Sumitomo Foundation.

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