Why Does the Reduction of Greenhouse Gas Emissions Enhance Firm Value? The Case of Japanese Manufacturing Firms

ABSTRACT This paper examines the influence of firms’ reductions of greenhouse gas (GHG) emissions on firm value, measured by Tobin's q. If the stockholders/investors regard the reduction of GHG emissions as a form of intangible value, the reduction of GHG emissions will enhance firm value. To prove this relation more precisely, this paper analyzes not only the effect of the reduction of GHG emissions on firm value but also that of the market discipline imposed by the stockholders/investors in terms of the reduction of GHG emissions. Using data on 641 Japanese manufacturing firms in the period 2006–2008, the random effect instrumental variable estimate supports the view that firms with strong market discipline imposed by stockholders/investors are more likely to reduce GHG emissions and, consequently, firms that reduce more GHG emissions are more likely to enhance firm value. Copyright © 2011 John Wiley & Sons, Ltd and ERP Environment.