Does the stock market value corporate environmental performance? Some perils of static regression models

Intangible assets not only help firms gain competitive advantages but also enable such advantages to persist when firms are not subject to imitation. Given that expenditure on environmental practices is a part of intangible assets, the absence of a dynamic perspective is a major impediment to the further development of the empirical economics of management. By exploiting fine‐grained measures of research and development assets and patent citations, this study isolates the value‐creating effect of corporate environmental performance through a dynamic lens. Using data from a balanced panel of Japanese manufacturing firms, a positive relationship between corporate environmental performance and firm value is observed even after addressing endogeneity. However, this relationship becomes statistically insignificant once dynamic panel data models are used to control for profit persistence. The results suggest that the use of static regression models can lead to the premature conclusion that it pays to be “green.”