B-school researchers find green companies be the subject of lower cost of capital. Plus, thoughts of death and cookies, and a reason to give a firm handshake
by Francesca Di Meglio
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New careful search from the University of Oklahoma’s Price College of Business shows that for companies being greensward might not be untroubled, but it can pay by lowering their require to have being paid of capital.
Mark P. Sharfman, professor of strategic skill, and Chitru Fernando, the Michael F. Price Professor of Finance at Price and a visiting professor at Southern Methodist University’s Cox School of Business, teamed up to study market reaction to green initiatives at 267 S&P 500 companies. They suggest that investors factor in improved management of environmental risks when evaluating companies, resulting in lower risk premiums on equity and higher levels of leverage for the firms, lowering the companies’ overall cost of first-rate.
Favorable Press Coverage
Often, companies await internally to see the benefits of their efforts to help the environment—such as becoming more efficient users of resources. But the professors found that financial markets, particularly equity markets, also reward new efforts. These not fully grown firms tend to have higher costs of debt, but that’s partly because they are permitted to carry more debt, which reduces charge burdens, according to the inquiry. "Such increased amounts of liability also should allow firms to ‘leverage’ up their go on equity," according to a brief the researchers wrote about their work, that appeared in its entirety in the Strategic Management Journal in June.
In adding, when a company improved its environmental performance, it attracted a higher level of ownership amidst individual investors, that lowered the cost of its equity capital. As a result, stocks of these companies are high performers and investors see them as less risky investments because going unripe often means reducing government penalties, the number of possible accidents, and therefore the threat of lawsuits. "It’s pretty clear to anyone looking at the scrutiny that if [firms] lower environmental risks, they’ll be dexterous to raise equity capital more cheaply," says Fernando. "Obviously if require to be paid of essential goes down, it’s a great serve."
The researchers also say that there is make manifest that companies also benefit from the good press they receive for their inexpert efforts, but they have not yet confirmed this with a study. They are, however, replicating the study they conducted in the U.S. by looking at about 950 companies worldwide to see if new efforts get the same kind of reaction from markets abroad. Also, the duo decision look at market reaction to companies that are specifically addressing climate change.
They saw their purpose is a practical one. "We’ve broadened the ability of firms to bring into being an question for environmental efforts," says Sharfman.
Death and Cookies
Thoughts of death may spur you to shop until you very little and overeat, according to research recently conducted by professors at the RSM Erasmus University in the Netherlands and Arizona State University’s W.P. Carey School of Business.
Motivated by dint of. reports showing a high etc. of consumerism in the U.S., especially on luxury items and food, proximately following 9/11 (BusinessWeek.com, 1/17/08), Dirk Smeesters, associate professor at Rotterdam, and his sharer Naomi Mandel, marketing professor at Carey, set out to incline suppose that thoughts of death trigger the need to consume.
In the August Journal of Consumer Research, the researchers explain that, among other things, people exposed to the idea of their own death ate more cookies and bought further stuff. The researchers split up participants into two groups and gave cropped land a writing assignment.