It Pays to Be Green: A Hedonic Stock Price Model for Environmentally Friendly Large U.S. Firms

This study attempts to estimate the non-market value of the environmental performance of a firm using a stock price model derived from Rosen’s hedonic price theory. Two different stock market models are developed to estimate the model, a basic firm’s stock market model and a modified Capital Assets Pricing Model (CAPM). The explanatory variables include risk factors, non risk stock characteristics, and corporate environmental policy, conduct and performance. This study uses Newsweek’s 2009 Green Ranking scores. The results show that risk factors, non-risk stock characteristics, and environmental scores variables are statistically significant in affecting stock price and equity return. The willingness to pay (WTP) are 3¢, 5¢, and 18¢, respectively for the green policy and performance score (GPPS), the reputation survey score (RSS), and the green score (GS). The four scores increase return on equity as much as 0.06%, 0.38%, 0.40%, and 2.06% respectively. A one point improvement in the three environmental scores is associated with an increase in an average firm’s value (market capitalization) of $17,840,820, $29,043,195, and $99,576,670 respectively.