This paper examines the effect of corporate environmental policy on institutional holdings, analyst coverage, and shareholder value.

We find a sharp asymmetry between corporate policies that affect the firm’s exposure to environmental risk (“toxicity”) and its perceived environmental friendliness (“greenness”).

We find a non-monotonic variation in ownership across the environmental performance spectrum. Both green and toxic firms have a larger number of shareholders relative to neutral firms, but a smaller percentage of institutional holdings. There is also some variation in holdings based on environmental performance across different types of institutional investors.

Our finding that institutional investors, including institutions who are unconstrained by socially responsible investment (SRI) norms, shun stocks with high environmental risk exposure, is consistent with the predictions of risk management theory and suggest that corporate environmental policies that mitigate risk exposure create value for all shareholders.

Although green investors may derive non-pecuniary benefits from holding “green” stocks, our finding that institutional investors, especially those unconstrained by SRI norms, also shun firms that have high greenness scores suggest that high greenness also does not increase shareholder value. Additionally, we find that analyst following is significantly higher for toxic firms.

Collectively, these findings indicate that the “smart money” controlled by institutional investors distinguishes between and reacts differently to different forms of corporate environmental policies.  We observe significant differences in Tobin’s Q across different environmental performance groupings. Both toxic and green firms have lower values of Tobin’s Q than neutral firms. We also fail to find a significant alpha in a portfolio of toxic stocks.


By: Chitru S. Fernando, University of Oklahoma – Michael F. Price College of Business, Mark Sharfman, University of Oklahoma – Michael F. Price College of Business, and Vahap Bülent Uysal, University of Oklahoma

See the full SSRN paper here