Mandatory recognition of externalities, price elasticity and the market value of firms : 110.899 thesis presented in partial fulfilment of the requirements for MBS degree

Abstract

The scene for environmental performance and disclosures is changing rapidly from that of a voluntary state to one where both are being mandated. One such regulatory initiative is that of the European Union Emissions Trading Scheme (EU ETS), under which all firms within certain industries have to comply with similar environmental performance and disclosure requirements. The imposition of such requirements can have both adverse and beneficial effects on firm value. The purpose of this study is to examine how EU ETS membership affects the market value of European firms. Using a sample of 1,985 firm-year observations from Great Britain, France, Germany, Spain and Italy, I find that joining the EU ETS has a positive impact on firm value, and this impact is larger for firms with high price elasticity of demand (PED). These findings suggest that a regulated environmental performance and environmental disclosure setting is likely to reduce uncertainties pertaining to externalities, in particular, for firms which are unable to shift their externality costs to their consumers.