Pollution and Capital Markets in Developing Countries

Ž .Journal of Environmental Economics and Management 42, 310�335 2001doi:10.1006�jeem.2000.1161, available online at http:��www.idealibrary.com on

Pollution and Capital Markets in Developing Countries1

Susmita Dasgupta and Benoit Laplante2

The World Bank, De�elopment Research Group, 1818 H Street, NW, Washington, DC 20433

and

Nlandu Mamingi

The Uni�ersity of the West Indies, Bridgetown, Barbados

Received August 10, 1998; revised April 13, 1999; published online January 19, 2001

It is said that firms in developing countries do not have incentives to invest in pollutioncontrol because of weak implementation of environmental regulations. This argument as-sumes that the regulator is the only agent that can create incentives for pollution control, andignores that capital markets, if properly informed, may provide the appropriate financial andreputational incentives. We show that capital markets in Argentina, Chile, Mexico, and thePhilippines do react to announcements of environmental events, such as those of superiorenvironmental performance or citizens’ complaints. A policy implication is that environmen-tal regulators in developing countries may explicitly harness those market forces by introduc-ing structured programs of information release pertaining to firms’ environmental perfor-mance: public disclosure mechanisms in developing countries may be a useful model toconsider given limited government enforcement resources. � 2001 Academic Press

1. INTRODUCTION

Though environmental regulations have been in use now for approximately 30years, it is generally recognized that their efficacy in controlling pollution emissionshas been dampened by a lack of appropriate monitoring and enforcement.3

1 Our most sincere thanks to Mrs. Maria Teresa Correa who for a period of 8 months relentlesslycollected the vast amount of information necessary to conduct the current analysis. We also thank thefollowing individuals for their collaboration and support: in Argentina, Messrs Hugo Medina andOsvaldo Mignini; in Chile, Mr. Carlos Parra; in Mexico, Messrs Alejandro Ritch and Ricardo Rivera; inthe Philippines, Mr. Sergio Marquez and Mrs. Socorro Clemente. We also thank Mr. Miodrag Deric andMr. Craig Meisner for their research assistance. We thank the participants at the Canadian Environ-

Ž .mental and Resource Economists Workshop Ottawa, October 1997 , the Trade, Global Policy and theŽ .Environment Conference World Bank, April 1998 , the Institute of Social and Economic Research

Ž . Ž .Seminar Barbados, March 1998 , and the IX Pacific Science Inter-Congress Taipei, November 1998for their generous comments. The findings, interpretations, and conclusions expressed in this paper areentirely those of the authors. They do not necessarily represent the views of the World Bank, itsExecutive Directors, or the countries they represent.

2 Please send correspondence to: Benoit Laplante, The World Bank, Development Research Group,MC2-629, 1818 H Street, NW, Washington, DC 20433.

3 We define monitoring as the process of verifying the firm’s status of environmental performanceŽ . Ž .e.g., compliance , and enforcement as the undertaking of actions e.g., fines to bring the firm to

Ž .improve its environmental performance e.g., comply with environmental standards .

3100095-0696�01 $35.00Copyright � 2001 by Academic PressAll rights of reproduction in any form reserved.

POLLUTION AND CAPITAL MARKETS 311

Resources devoted to the monitoring of standards have typically been character-ized as insufficient.4 Moreover, when compliance with the standards is found to belacking, it is generally acknowledged that fines and penalties are too low to act aseffective deterrents. In a recent study of environmental regulations in East Asian

� �countries, O’Connor 19 writes:

In several of the countries studied here,5 the monitoring problem is compounded by weakenforcement. In short, when violators of standards are detected, if penalised at all they often

Ž .face only weak sanctions. . . . polluters are exempted from fines either on grounds offinancial hardship or because the violators wield undue political influence. Perhaps the mostpervasive problem is that, even when fines are levied, they are frequently so low in realterms that they have little if any deterrent value. In virtually all the countries studied, there

Ž .remains considerable room for improvement on the enforcement front. p. 94

It is indeed generally said that firms in developing countries do not haveincentives to invest in pollution control effort because of weak implementation ofenvironmental regulation: compliance costs exceed expected benefits. However,this argument assumes that the environmental regulator is the only agent that canpenalize firms lacking pollution control effort. Recent research indicates that localcommunities may exercise considerable leverage to pressure firms to improve theirenvironmental performance.6 The argument also ignores that capital markets may

Žreact negati�ely to the announcement of adverse environmental incidents such as.violation of permits, spills, court actions, complaints or positi�ely to the announce-

ment of superior environmental performance. When accounting solely for regula-tors’ fines and penalties and ignoring the costs that may be imposed by communi-ties and markets, the expected costs associated with poor environmental perfor-mance may be significantly underestimated. Hence, the inability of formal institu-tions, especially in developing countries, to provide incentives for pollution controleffort via the traditional channel of fines and penalties may not be as serious animpediment to pollution control as is generally argued. Communities and capitalmarkets, if properly informed, may in specific circumstances provide the appropri-ate reputational and financial incentives.

A limited number of papers have analyzed the reaction of capital markets toenvironmental news in Canada and the United States. These studies have generallyshown that firms suffer from a decline in market value upon announcement ofadverse environmental news.7 The impact of firm-specific environmental news onmarket value may work its way through various channels: a high level of pollutionintensity may signal to investors the inefficiency of a firm’s production process; itmay invite stricter scrutiny by environmental groups and�or facility neighbors; or itmay result in the loss of reputation, goodwill, and the like. On the other hand, the

4 � � � � � �See Russell 22 . On the impact of monitoring on environmental performance, see 14 , 16 , and� �18 .

5 The countries studied are Japan, Korea, Taiwan, Thailand, and Indonesia.6 � � � � � �See 1 , 2 , and 20 .7 In the United States, these studies include, among others, analysis of the reaction of markets to

� � � � � �releases of the Toxics Release In�entory 6 , 11 . Lanoie and Laplante 12 analyze the reaction of capital� �markets to environmental news in Canada. For a survey of these studies, see 13 .

DASGUPTA, LAPLANTE, AND MAMINGI312

announcement of a good environmental performance or of the investment incleaner technologies may have the opposite effect: lesser scrutiny by regulators and

Ž .communities including the financial community and greater access to interna-tional markets, among other things.8

In this paper, we assess whether or not capital markets in Argentina, Chile,Mexico, and the Philippines react to the announcement of firm-specific environ-mental news. To our knowledge, the current analysis is the first of this natureperformed in developing countries. This is potentially important from a policyperspective since it is not immediately clear that capital markets in these countriesare developed enough to replicate the results observed in Canada and the United

Ž .States. We show that capital markets react negatively decrease in firms’ value tocitizens’ complaints targeted at specific firms. We also show that markets react

Ž .positively increase in firms’ market value to the announcement of rewards andexplicit recognition of superior environmental performance. A policy implicationfrom the current analysis is that environmental regulators in developing countriesmay explicitly harness those market forces by introducing structured programs ofinformation release on firms’ environmental peformance, and empower communi-ties and stakeholders through environmental education programs.9

These results may also shed some new light on the pollution haven hypothesis. Anumber of studies have examined the impact of environmental regulations oninternational competitiveness.10 Many of these have concluded that pollution-in-tensive firms have not relocated in developing countries to benefit from lowerenvironmental standards and�or poor enforcement of environmental regulations.

� �Hettige et al. 8 observe that ‘‘one possibility is that the expected profitability ofinvestment in pollution-intensive sectors has also been affected by growing concern

Ž .over legal liability or reputational damage’’ p. 480 . Our results suggest that atleast in the specific cases of publicly traded companies, the benefits associated withpoor traditional enforcement of environmental compliance may have been signifi-cantly overestimated.

In the next section, we describe our dataset. In Section 3, we briefly describe theevent-study methodology used to measure the reaction of capital markets to

Ž .environmental news both positive and negative news . Results are presented inSection 4. We conclude in Section 5.

2. DATASET

For each country retained in this analysis�Argentina, Chile, Mexico, and thePhilippines�we selected a newspaper which has a large circulation and is of

8 � � � �See 21 and 11 for a more detailed discussion.9 We know of at least two such programs currently in place in developing countries: in Indonesia

Ž . Ž .PROPER Prokasih and the Philippines Ecowatch . Similar programs are currently being developed inMexico and Colombia.

10 � �See 9 and references therein.


TABLE IŽ .Number of News 1990�1994

1990 1991 1992 1993 1994

ArgentinaTotal number of environmental news 201 189 168 198 170With name of nontraded companies 28 32 48 33 27With name of publicly traded companies 0 0 2 13 15

ChileTotal number of environmental news 309 285 293 282 272With name of nontraded companies 29 48 43 22 32With name of publicly traded companies 4 25 34 36 16

MexicoTotal number of environmental news 625 707 759 613 618With name of nontraded companies 161 143 118 73 88With name of publicly traded companies 14 25 7 10 8

PhilippinesTotal number of environmental news 317 309 334 265 266With name of nontraded companies 54 47 44 47 55With name of publicly traded companies 8 8 4 9 12

particular interest to the business community.11 Environmental news was collectedin each of the countries over the period 1990�1994 inclusively. Once these newsitems were collected, we identified those involving firms traded in local capital

Ž .markets. As shown in Table I, the number of environmental news i.e., newsclipsŽcollected in each country is relatively large a total of 7354 environmental news was

.collected over the period 1990�1994 , with Mexico alone representing 47.5% of thetotal number of news. The number of environmental news events slightly declinedover the period of analysis.12 Approximately 20% of the news involves specificfirms, traded and nontraded. As expected, the number of news involving publiclytraded companies is relatively small in all countries, though large relative to theirnumber in the economy. This may be explained by their generally greater visibility.

ŽEnvironmental news was divided into two groups: positive e.g., rewards, invest-. Ž .ment in pollution control , and negative e.g., spills, complaints, warnings . The

sample set is described in Table II. As can be observed, Chile registered 53 eventsŽ .environmental news involving 17 publicly traded firms over the period 1990�1994;20 of those events were positive while 33 were negative. Argentina registered 20

Ž .events 5 positive and 15 negative involving 11 firms. The Manila Bulletin reported

11 In the United States, the Wall Street Journal is generally the preferred source of information forconducting event-study analyses. In Argentina, environmental news was collected from the newspaper

Ž .La Nacion daily circulation of approximately 250,000; ranks 3rd in Buenos Aires ; in Chile, we used ElŽ .Mercurio daily circulation of approximately 200,000; ranks 3rd in Santiago ; in Mexico City, we usedŽ .Excelsior daily circulation of 200,000; ranks 7th in Mexico City ; finally, in the Philippines, news was

Ž .collected from the Manila Bulletin daily circulation of 300,000; ranks 3rd in Manila . These four dailynewspapers were reviewed one by one, most in microfiche format, for the entire period of analysis. Allnewspapers were available from the Library of Congress. Information from missing issues was obtaineddirectly from the publishers of the papers in the respective countries.

12 � �For a thorough description of these environmental news, see 4 .


TABLE IIDescription of Data Set

Nature and numberof events

aCountry Name of firm Sector of activity Positive Negative

Argentina Astra Oil 1 1Ipako Oil 1 2Perez Oil 0 2YPF Oil 1 4Celulosa Pulp and paper 1 0Telefonica Telephone 0 1Colorin Chemical 0 2Indupa Chemical 1 0Molinos Rio Food 0 1Sevel Metal 0 1Siderca Metal 0 1

Total 11 firms 6 sectors 5 15

Chile Endesa Electric 3 4Chilgener Electric 4 4CMPC Pulp and paper 2 1CAP Metal 3 4Volcan Building material 0 1Minera Investment 0 1Vapores Transportation 0 1Emos Water 3 1Puerto Water 0 1Victoria Fabric 0 1Iansa Food 1 1Molymet Metal 1 1Coloso Fishery 0 5Iquique Fishery 1 5Lirquien Building material 0 1Chilectra Electric 1 1Eperva Fishery 1 0


Mexico Cydsasa Pulp and paper, oil 1 3Ž .Grupo Maya A Cement 0 6Ž .Grupo Maya B Cement 0 4

Ž .Tolteca Tolmex Cement 0 2Ž .Met-Mex Penoles A Mining 1 6Ž .Met-Mex Penoles B Mining 0 3

Femsa Food 1 0Grupo Vitro Manufacture 1 0GC3 Cement 0 1Kimberly y Clark Pulp and paper 0 2Grupo Bimbo Food 0 2Telefonos de Mexico Communication 0 2



Ž .TABLE II� Continued

Nature and numberof events

aCountry Name of firm Sector of activity Positive Negative

Philippines Apex Mining Mining 0 1Atlas C. Mining Mining 1 0Ayala Land, Inc. Property 0 1Benguet Mining 3 2Jolibee Food 1 0Lepanto Mining 0 1Manila Mining Mining 1 0Mondragon Trading 0 1San Miguel Food 4 1Robinson Land Property 1 0


a Complete names of firms appear in Appendix 1.

Ž .18 events 10 positive and 8 negative with 10 firms. Finally, the Mexican sampleŽ .consists of 35 events of which only 4 were positive involving 10 publicly traded

firms. Observe that the number of events in Table II is smaller than the number ofŽ .news with name of publicly traded companies in Table I. This is the case since a

significant number of newsclips are simply a repetition or follow-up on an initialevent and do not provide any additional information to what is already known. Inmost cases, we have included in our dataset only the announcement of the initialevent unless subsequent announcements provided significantly different or addi-tional information about the event.13

3. EVENT-STUDY METHODOLOGY

The event-study methodology is used in this study to examine the reaction ofŽ . 14investors to positive and negative news also called events . The methodology is

based on the assumption that capital markets are sufficiently efficient to evaluateŽ .the impact of new information events on expected future profits of the firms. The

13 For example, especially in the case of environmental accidents such as a spill, the nature andimpact of the accident may be covered in two or three consecutive issues of the newspaper. In suchsituations, only the initial announcement is treated as an event. On the other hand, for example, it issometimes the case that a firm announces the investment in a pollution control project, and monthslater the firm is rewarded publicly for its effort to control pollution. These two announcements pertainto the same effort undertaken by the plant but nonetheless provide information of a different nature,and were thus treated as two different events. To this extent, we do not examine the potentialcumulative impact of a sequence of announcements pertaining to a single event. We treat eachannouncement as an event and measure whether or not capital markets react to this type ofinformation.

14 � �For more details, see 15 .


TABLE IIICapitalization of the Stock Market of Argentina, Chile, Mexico, and the

aŽ .Philippines, 1990�1994 in Million of U.S. Dollars

Market 1990 1991 1992 1993 1994

Argentina 3268 18,509 18,633 43,967 36,864Chile 13,645 27,984 29,644 44,622 68,195Mexico 32,725 98,178 139,061 200,671 130,246Philippines 5927 10,197 13,794 40,327 55,519

a Source: International Finance Corporation, Emerging Stock Markets Factbook,1995.

countries retained in this study are countries where stock markets are believed towork reasonably well, where market capitalization is relatively high and increasing

Ž .over time Table III , and where market concentration is not an impediment toŽ . 15conducting event-study analyses Table IV .

Ž .The methodology involves the following steps: 1 identification of the events of16 Ž .interest and definition of the event window; 2 selection of the sample set of

17 Ž .firms to include in the analysis; 3 prediction of a ‘‘normal’’ return during theŽ .event window in the absence of the event; 4 estimation of the abnormal return

within the event window, where the abnormal return is defined as the differenceŽ .between the actual and predicted returns; and 5 testing whether the abnormal

return is statistically different from zero. Several methods may be used to estimateŽ .abnormal returns: the single-index model constant mean return model , the

Ž .market model, and the capital asset price model CAPM are the most widely used.

15 Although market concentration may appear to be high, note that the IFC General Indexesrepresent only a fraction of total market capitalization. Actual market concentration is lower thansuggested in Table IV.

16 Ž .The event window consists of the day where the event occurred Day 0 and some days before andafter the event.

17 Firms may be excluded if simultaneous events are occurring within the event window.

TABLE IVaMarket Concentration in the IFC General Indexes, End�1994

IFCG Index share of total 10 Largest stocks’ share ofMarket market capitalization total market capitalization

Argentina 50.9 41.7Chile 66.1 46.4Mexico 63.9 33.8Philippines 54.4 44.3

a Source: International Finance Corporation, Emerging Stock Markets Fact-book, 1995.


The market model assumes a linear relationship between the return of anysecurity to the return of the market portfolio:

R � � � � R � eit i i mt i t

with E e � 0 and Var e � � 2 1Ž . Ž . Ž .i t i t ei

where t is the time index, i � 1, 2, . . . , N stands for security, R and R are thei t mtreturns on security i and the market portfolio, respectively, during period t, and eitis the error term for security i.

Ž .Equation 1 is generally estimated over a period which runs from 120 to 210days prior to the event up to the days prior those that define the event window.

Ž .With the estimates of � and � from Eq. 1 , one can predict a ‘‘normal’’ returni iŽduring the days covered by the event window. The prediction error the difference

.between the actual return and the predicted normal return , commonly referred toŽ .as the abnormal return AR for a single security i at a given time t, is then

calculated as:

ˆAR � R � � � � R 2Ž .ˆi t i t i i mt

Under the null hypothesis, the abnormal returns will be jointly normally deter-2Ž .mined with a zero conditional mean and conditional variance � AR :i t

21 R � RŽ .mt m2 2� AR � � � 1 � 3Ž . Ž .i t e 2i L �m

Ž .where L is the estimation period length i.e., number of days used for estimation2 2Ž .and R is the mean of the market portfolio. With L large, � AR � � .m it ei

For each individual event, one can estimate the abnormal return and relevanttest statistics at each instant in time within the event window. However, in order todraw overall inference about the reaction of capital markets, one can also aggre-

Žgate the abnormal returns across a number of events usually across events of a. Ž .similar nature . Hence, for any given subset of N events or securities , the subset

Ž .average abnormal returns AAR at each instant t within the event window istcomputed as

N1AAR � AR 4Ž .Ýt i tN i�1

For large L, the variance is

N12var AAR � � 5Ž . Ž .Ýt e2 iN i�1

Ž .To test for the significance of AAR a Z or t test can be derived.iIn order to test for the persistence of the impact of the event during a period

Ž .T � T , the abnormal return for a given security i can also be added to obtain2 1Ž Ž ..the cumulated abnormal returns CAR T , T for security i over the periodi 1 2


Ž .T � T :2 1

T2

CAR T , T � AR 6Ž . Ž .Ýi 1 2 i tt�T1

where T � T � t � T � T event window, and T and T are the lower anda 1 2 b a b18 Ž .upper limits of the event window, respectively. Asymptotically as L increases

the variance of the cumulative abnormal return for security i is

� 2 T , T � T � T � 1 � 2 . 7Ž . Ž . Ž .i 1 2 2 1 ei

To test the null hypothesis of zero cumulative abnormal return, one canŽ . Ž 2Ž .formulate a Z test as CAR T , T � N 0, � T , T :i 1 2 i 1 2

CARZ � � N 0, 1 8Ž . Ž .1�22� T , TŽ .Ž .i 1 2

An aggregation of interest can also be performed across both time and events. Inthat scenario, the average cumulative abnormal return for a subset of N eventsbetween two dates T and T is defined as:1 2

N1CAAR T , T � CAR T , T 9Ž . Ž . Ž .Ý1 2 i 1 2N i�1

where N is the number of events. The variance of CAAR is

N12var CAAR T , T � � T , T 10Ž . Ž . Ž .Ž . Ý1 2 i 1 22N i�1

Under the null hypotheses that the abnormal returns are zero,

CAAR T , TŽ .1 2Z � � N 0, 1 11Ž . Ž .1�2

var CAAR T , TŽ .Ž .Ž .1 2

� �As pointed out by MacKinlay 15 , this distributional result is asymptotic withrespect to the number of securities N and the length of estimation window L. Inthe next section, we present results obtained from using the single-index modelŽ . 19constant mean return model .

18 T and T are thus contained within the event window and the aggregation of the abnormal return1 2takes place between those days within the window. As a possibility, T can coincide with the lower1bound of the event window and T with the upper bound.2

19 The single-index model is a particular case of the market model described above. Where marketreturns were available, we also obtained results using the market model. Results were similar to those

� �presented here. In fact, Henderson 7 points out that the three estimating methodologies yield resultsof similar nature.


4. EMPIRICAL ANALYSIS

We apply the event-study methodology to the environmental events collected ineach of the country over the period 1990�1994.20 The size of the event window wasdetermined empirically, as the theory pertaining to the appropriate size of theevent window is not very instructive. We thus searched over a period of 10 daysbefore and 10 days after the event for the event window yielding the beststatistically significant results. This search indicates that an event window of 11

Ždays 5 days prior to the announcement, the day of the announcement, and 5 days.after yields the best results.

Ž .With respect to positive news, Table V with details in Appendix 2 indicatesstatistically significant increases in market values for 20 events out of 39. It is offurther interest to note that 9 of these 20 statistically significant events involve thereport of an agreement with the regulator or the explicit recognition by theregulator of a superior environmental performance. Markets appear to react tothe explicit recognition of an investment in pollution control or superior environ-mental performance by the authorities. For those events, market values increase bymore than 20% over the entire event window.

As indicated earlier, one may pool together events and test for the statisticalsignificance of the average abnormal return for the events thus pooled. Given theresults obtained on individual stock markets, it is of relevance to test if eventsreporting the explicit recognition of superior performance as a whole are statisti-cally significant. In Table VI, we have grouped together these government actionsand treated them as a single set of events. As can be observed, explicit recognitionevents as a whole are strongly statistically significant on Days �4 and �1.Moreover, the difference between government actions and other positive events isstatistically significant at Day �4 and Day �1.

Ž .With respect to negative events, Table VII with details in Appendix 3 indicatesthat there are 33 events out of 85 for which statistically significant decreases inmarket values are recorded. Of these 33 events, 17 events are related to some formof government or citizens’ complaints.

Given the nature of these results, we have pooled together government andcitizens’ complaints and tested whether or not they had a statistically significantdifferential impact on market values when compared to all other negative events.Results in Table VIII indicate that government and citizens complaints as a wholeare statistically significant at Day �1. Moreover, they have a statistically differen-tial impact on market values when compared to all other negative events at Day�1.

We may interpret this result by noting that the filing of a complaint can provideunanticipated news to markets leading them to expect further actions, yet unknown,to be undertaken. Reductions in market values for events pertaining to complaintsrange from 4 to 15%. As is observed in Table IX, these losses are much greater inmagnitude than any losses observed in previous studies conducted in Canada and

20 A potential issue is raised with events occurring in early 1990 in that they may be a follow-up ofŽ .initial events taking place in 1989. Three such events hold our attention: January 9 Chilgener and

Ž .March 21 and 23 Benguet . For each of these events, a further newspaper search was made fromSeptember to December 1989. It failed to reveal any other news that could have been related to theevents described here. We have thus opted to retain these events in our dataset.


TABLE VPositive Events

Name ofcompany Date Nature of event

ARGENTINA†Astra 3�15�94 Investment in environmental protection.

Ipako 2�7�93 Investment in environmental protection.YPF 12�24�94 Investment to save birds.

†Celulosa 8�3�92 Investment in manufacturing recyclable papers.Indupa 2�7�93 Company action: agreement with government for environmental

performance improvement.

CHILE†Endesa 1�31�92 Investment in pollution abatement.

9�6�93 Court verdict: positive for the company.†8�8�94 Investment in environmental protection.†Chilgener 1�9�90 Pollution abatement: agreement between company and government.

8�5�90 Pollution abatement announcement.†11�9�93 Government action: agreement approved by the President of Chile.

6�23�94 Company action: declaration of technical aspects of the agreement.†CMPC 2�26�92 Investment in water pollution abatement.

†1�7�94 Investment realization: recycling plant to be inaugurated by thepresident of Chile.

†CAP 8�15�92 Court verdict: investment in pollution abatement.10�2�92 Investment action: use of equipment for pollution control.

†11�8�92 Government action: recognition of the company’s investment inpollution control equipment.

†Emos 4�16�92 Investment in construction of a waste water treatment plant.2�24�93 The treatment plant will start working from March 15.8�11�93 President of Chile will officially inaugurate the plant.

Iansa 9�26�93 Investment in water pollution abatement.Molymet 10�11�93 Pollution treatment plant inaugurated by the President of Chile.

†Iquique 8�11�93 Investment in pollution abatement.Chilectra 5�29�93 Company reward for environmental performance.Eperva 7�1�94 Self impact assessment of environment.

MEXICOCydsasa 5�11�92 Investment in improvement of environment.

†Apenol 7�10�93 Announcement: existence of pollution control equipment.Femsa 9�14�91 Agreement with government on pollution abatement.

†Vitro 4�18�91 Investment in environmental projects.

PHILIPPINES†Atlas 10�20�90 The company has a representation project since 1970.†Benguet 12�28�92 Government action: mandatory environmental guarantee fund for the

company.† Ž .7�19�93 Government action: Reward trophy for reforestation program.

2�6�94 Investment in environmental protection.†Jolibee 6�28�94 Investment in recyclable paper.†Manila 4�17�92 Compliance certified by the Environmental Regulatory authority of

Mining Philippines.San Miguel 11�5�90 Investment in waste water treatment plant.

†2�10�91 Government action: praise company for having environmental concern.9�14�91 Company action: implementation of reforestation project.6�8�93 Announcement: new waste water treatment plant.

† Indicates an increase in market value statistically significant at p � 0.10.


TABLE VIaGovernment Actions vs All Other Positive Events

Day �5 Day �4 Day �3 Day �2 Day �1 Day 0 Day �1 Day �2 Day �3 Day �4 Day �5

Explicit recognitionAAR 55.372*** 14.086**

Ž . Ž .6.974 1.774CAAR 7.933 10.524

Ž . Ž .0.707 0.501

All other positive eventsAAR 0.369 �0.970

Ž . Ž .0.093 �0.244CAAR �2.375 �1.082

Ž . Ž .�0.422 �0.103

Explicit recognition vs All other positive eventsAAR 55.003*** 15.055**

Ž . Ž .6.193 1.695CAAR 10.308 11.607

Ž . Ž .0.193 0.494

a ŽThis table uses the results of events listed in Table V with the exception of the outliers large. Ž . Ž .residual variances compared to others : YPF 12�24�94 and San Miguel 6�8�93 . The event window

Ž .is five days prior to the event to five days after the event, including the day of the event �5 to �5 .AAR stands for average abnormal return and CAAR is the average cumulative abnormal return. CAARis computed for day �5 up to the specific day of interest. Within brackets is the value of the z statistics.

Ž .For ‘‘Explicit recognition vs. All other positive events,’’ the AAR CAAR is defined as the differenceŽ . Ž .between the AAR CAAR for ‘‘Explicit recognition’’ and the AAR CAAR for ‘‘All other positive

events.’’ The z statistics are defined accordingly. For a given day, results are reported only if the AAR issignificant for either ‘‘Explicit recognition’’ or ‘‘All other positive events’’ or both. Significant CAARsare considered if they go along significant AAR in the event window.

Ž*, **, *** Significant at the 10, 5, and 1% level, respectively one-tailed test except for ‘‘Explicit.recognition vs All other positive events’’ .

the United States. This may be explained by a greater volatility of capital marketsin developing countries as well as by a greater premium to information whichotherwise may generally not be as readily available as in more developed markets.21

5. CONCLUSION

In this paper, we have shown that despite a generally acknowledged poorenforcement of environmental regulations, capital markets in Argentina, Chile,Mexico, and the Philippines appear to react to the announcement of specificpositive and negative environmental events. While fines and penalties used by theenvironmental agencies of these countries may have fallen short of creatingincentives for pollution control, capital markets have penalized firms which are theobjects of citizens’ complaints, and rewarded firms which have obtained the explicitrecognition of superior environmental performance.

21 � �On capital markets volatility in developing countries, see 3 .


TABLE VIINegative Events


ARGENTINAAstra 9�10�93 Court action.

†Ipako 10�16�92 Government action: warning about pollution problem.9�9�93 Accident.

Perez 5�2�93 Government action: warning for oil spill.12�12�94 Accidental oil spill.

† Ž .YPF 11�7�93 Environmental problem birds killed .†11�30�93 Citizens complaint.

1�24�94 Government action: warning.8�10�94 Oil spill to river.

Colorin 8�2�93 Suspicious transfer of solid waste.†11�2�94 Government deadline to company.

Molinos 9�30�93 Government action: fine.Sevel 8�2�93 Government Court action against company.Siderca 11�2�94 Government action: warning.

CHILE†Endesa 1�19�92 Government complaint.†9�29�92 Warning from environment ministry.

2�7�93 President’s advice on pollution improvement.†4�21�93 Citizens protests against company.

Chilgener 7�13�90 Government complaint.1�19�92 Government complains on bad environmental performance

of the company.†4�8�92 Environmental accident.†4�16�92 Court action by citizens.†CMPC 9�30�92 Citizens complain about solid waste pollution.

†CAPC 4�2�91 Air polluter.6�27�92 Court action by citizens.8�8�92 Grace period granted to curb water pollution.

†8�12�92 Government supports court action.Volcan 12�2�93 Government black list of polluters.

†Minera 9�2�91 Court action.Vapores 6�6�92 Company is fined by government.Emos 10�17�93 Accident: drinking water contamination.Puerto 7�23�92 Government complains about health hazard in the vicinity

of the company.Victoria 12�2�93 Government black list of air polluter.Iansa 5�29�93 One of the plants ordered to shut down.Coloso 4�1�92 Government action: fine.

12�2�93 Government action: company shut down for few hours.†2�5�94 Court action: fine.†3�11�94 Government action: company shut down.†3�18�94 Citizens complaint: accident.

Iquique 4�1�92† Government action: fine.†12�21�93 Government action: fine.

†2�5�94 Court action: fine.† Ž .3�10�94 Government action Company closed for 72 hours .†3�11�94 Court action for bad smell problem.

Lirquien 7�15�92 Government black list of air polluter.Chilectra 7�11�92 Citizens complain against company expansion.

†Molymet 1�19�92 Government complaint: company major air polluter.


Ž )TABLE VII� Continued


PHILIPPINES†Apex 4�24�91 Government action.†Ayala 12�8�94 Government warning.

Benguet 3�21�90 Government action: penalty.3�23�90 Workers dismissals.

†Lepanto 10�22�90 Pollution problem resulting in death and illness.Mondragon 10�11�94 Complaint by citizens about tree cutting.Robinson Land 6�15�94 Government action: company shut down.San Miguel 10�7�94 Oil spill.

MEXICOCydsasa 2�16�90 Spill causing death and injury.

3�19�92 Black list of air polluter for company’s subsidiary.10�9�92 Government action: environmental audit.

Ž .Grupo Maya A 10�4�90 NGO’s black list of air polluter.3�12�91 Company relocation requested by citizens.3�15�91 Government action: warning.9�20�91 Citizens complaint.

†11�27�91 Citizens and ecologists complaint.7�29�92 Citizens complaints.

Ž .Grupo Maya B 3�12�91 Company relocation requested by citizens.3�15�91 Government action: warning.9�20�91 Citizens complaint.

†11�27�91 Citizens and ecologists complaint.Tolteca 10�14�90 NGO’s black list of air polluter.

2�13�92 Temporary and partial shutdown.Met-Mex 3�22�91 Citizens complaints.

Ž .Penoles A6�4�91 Company pollution bad record pointed out by a Senator.

†8�9�91 Government action: company temporarily shut down.3�2�94 Accident: citizens complaint.3�4�94 Pollution control equipment investigation.8�27�94 Relocation of 300 families living in the vicinity of the

company.†Met-Max 3�22�91 Citizens complaints.

Ž .Penoles B†6�4�91 Company pollution bad record pointed out by a Senator.

3�4�94 Pollution control equipment investigation.Cementos de 5�25�92 Government action: warning about environmental

Ž .Chiguagua GC3 performance.†Kimberly Clark 5�21�92 Government action: fine for water pollution.†Grupo Bimbo 3�19�92 Black list of air polluter.

2�14�93† Government action: initiate court action.Telefonos de 5�21�93 Government action: warning about tree cutting.Mexico

6�9�94 Government action: fine.

† Indicates a reduction in market value statistically significant at p � 0.10.


TABLE VIIIaComplaints vs All Other Negative Events

Day �5 Day �4 Day �3 Day �2 Day �1 Day 0 Day �1 Day �2 Day �3 Day �4 Day �5

ComplaintsAAR �10.486***

Ž .�3.346CAAR �6.299

Ž .�0.900All other negative events

AAR �1.343Ž .�0.490

CAAR �0.334Ž .�0.055

Complaints vs All other negative eventsAAR �9.143**

Ž .�2.197CAAR �5.965

Ž .�0.644

a ŽThis table uses the results of events listed in Table VII with the exception of the outliers large. Ž . Ž .residual variances compared to others : Lirquiren 7�15�92 and Victoria 12�2�93 . For other details,

see Table VI.

These results need to be interpreted with care, and a number of caveats are inorder including the following three. First, we are certainly not arguing that strong

Ženforcement of regulations should be abandoned and that markets firms, con-.sumers, communities be left to themselves to negotiate and induce pollution

abatement from polluters. Indeed, not all firms may be responsive to the public

TABLE IXComparative Results

ObservedŽ .Selected studies Events Media reaction %

� � Ž .Muoghalu et al. 17 Filing of lawsuit for Newspaper USA �1.2violation of RCRA

� � Ž .Lanoie and Laplante 12 Court finds firm guilty Newspaper Canada �1.65for violating environ.

Regulation� � Ž .Klassen and McLaughlin 10 Environmental awards Newspaper USA �0.82� � Ž .Klassen and McLaughlin 10 Environmental crisis Newspaper USA �1.5

� �Hamilton 6 List of polluters Toxics Release �0.3Ž .Inventory USA

� �Konar and Cohen 11 List of polluters Toxics Release �1.3Ž .Inventory USA

� �Lanoie et al. 13 List of polluters British Columbia �2Ž .Canada


release of their environmental performance, nor would all communities be able touse the revealed information appropriately or capital markets react to such

� �information. In a recent paper, Foulon et al. 5 have shown that public disclosuremay indeed complement a strong enforcement of environmental regulation. How-ever, these results do suggest that in a number of circumstances, market forcesŽ .even in developing countries have not remained idle upon receiving signals of the

Ž .environmental performance of firms and have penalized complaints or rewardedŽ .recognition of superior environmental performance the owners of the firmthrough changes in market values. This is the result of interest in this paper.Further research in this area will indicate whether or not our findings can begeneralized, and will provide a greater understanding of the mechanisms whichunderpin the reaction of capital markets.

Second, whether or not firms have ‘‘voluntarily’’ undertaken pollution abatementactivities for obtaining a reward, and whether or not adverse market reaction hasled firms to subsequently invest in pollution control is a further issue of investiga-tion, especially in developing countries.22 It is currently beyond the realm of ourpossibilities to comprehensively address this issue as it requires a vast amount offirm-level data that are not readily available for the countries studied here. Froman anecdotal point of view, however, it is interesting to note, among others, that

Ž .after Chilgener Chile had released a cloud of toxic air pollution over Santiagoand suffered a loss of 5% of its market value in April 1992, it announced onSeptember 25, 1992, an investment of 115 million dollars to control air pollution.

Finally, we do not know whether or not information will lead firms to behave ina socially optimal way. However, nor do we know if environmental standards aresocially optimal. In this sense, it may be unfair to criticize the role of informationas a policy tool on the basis that firms may react in a way that is not socially

Ž .optimal e.g., overinvesting in pollution abatement . Perhaps a better element ofcomparison is the following: in order to achieve a gi�en level of desired environ-mental performance, would the traditional approach of fines, penalties, court

Ž .actions, and the like with its large transaction costs or information provisionŽ .prove to be more efficient i.e., least costly ? We believe that in all likelihood the

latter will prove to be more efficient. However, this is not to say that informationprovision will induce the desired behavior in each and every case. Nor do we arguethat more information is always necessarily better. The specific circumstancesunder which information provision may work best has been the object of some

Ž � �.research e.g., Hamilton 6 and will continue to do so. Further research shouldprovide greater insight as to the exact role and impact that communities andmarkets may have on firms’ environmental performance, and thereby on theevolving role of the regulator.

22 � �Konar and Cohen 11 have shown that firms that have suffered the largest reduction in marketvalue following the release of the TRI in 1989 have subsequently invested most in pollution abatement.


APPENDIX 1: COMPLETE NAME OF COMPANIES IN SAMPLE SET

ARGENTINA

Astra: Astra Compania Argentina de PetroleoIpako: Ipako Industria PetroquimicaPerez: Perez CompaneYPF: Yacimientos Petroliferos FiscalesCelulosa: Empresa Celulosa ArgentinaTelefonica: Empresa Telefonica de ArgentinaColorin: Colorin Industrial de Material SinteticoIndupa: IndupaMolinos Rio Molinos Rio de la PlataSevel: Sevel ArgentinaSiderca: Siderca

CHILE

Endesa: Empresa Nacional de ElectricidadChilgener: ChilgenerCMPC: Compania Manufacturera de Papetes y CartonesCAP: Compania de Acero del PacificoVolcan: Compania Industrial el VolcanMinera: Compania Minera TamayaVapores: Compania Sud Americana de VaporesEmos: Empresa Metropolitana de Obras SanitariasPuerto: Empresa Portuaria PuchocoVictoria: Fabrica Victoria de Puente AltoIansa: Industria Azucarara NacionalMolymet: Molibdenos y MetalesColoso: Empresa Pesquera ColosoIquique: Pesquera IquiqueLirquien: Vidrios y Planos LirquienChilectra: ChilectraEperva: Empresa Pesquera Eperva

MEXICO

Cydsasa: Celulosa y DerivadosGrupo Maya: Grupo Empresarial Maya

Ž .Tolteca Tolmex : Cementos ToltecaMet-Mex Penoles: Empresa Metalurgica Met-Mex PenolesFemsa: Formento Economico MexicanoVitro: Grupo VitroGC3: Cementos de ChiguaguaKimberly Clark: Kimberly y Clark de MexicoBimbo: Grupo BimboTelmex: Telefonos de Mexico

PHILIPPINES

Apex Mining: Apex Mining CompanyAtlas C. Mining: Atlas Consolidated Mining & Development CorporationAyala Land: Ayala LandBenguet: Benguet CorporationJolibee: Jolibee CorporationLepanto: Lepanto Consolidated Mining CompanyManila Mining: Manila MiningMondragon: Mondragon InternationalSan Miguel: San Miguel CorporationRobinson Land: Robinson Land Corporation

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Pollution and Capital Markets in Developing Countries

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