Toxic Chemical Releases and Idiosyncratic Return Volatility: A Prospect Theory Perspective

Bahadar, S
Nadeem, M
Zaman, R
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Journal Article
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We investigated whether and how firms’ toxic chemical releases (TCRs) affect idiosyncratic return volatility (IRV) using a prospect theory lens. Utilising a large sample of US public listed firms over the period 2001–2018, we find a significant and positive association between TCRs and IRV, suggesting that firms releasing more toxic chemicals have higher IRV. Additional analyses show that a positive association between TCR and IRV is more evident among firms with (i) high revenue, (ii) lower financial constraints and (iii) fewer environmental violations. A further test also suggests that a positive association between TCRs and IRV is contingent on political leadership ideology and market states. Our results remain consistent with weighted TCRs, IRV based on the Fama–French three-factor model, fixed-effect two-stage least square estimator (FE-2SLS), and other robustness checks. These findings shed light on the role of equity markets as a driver for capital-intensive pollution abatement activities and enhanced compliance with environmental laws, standards and best practices.

Social Sciences , Business, Finance , Business & Economics , Fama-French three-factor model , idiosyncratic return volatility , prospect theory , toxic chemical releases , CORPORATE ENVIRONMENTAL PERFORMANCE , BEHAVIORAL AGENCY MODEL , FINANCIAL PERFORMANCE , POLLUTION-ABATEMENT , EQUITY PREMIUM , STOCK RETURNS , RISK , INFORMATION , MANAGEMENT , GREEN , 38 Economics , 3502 Banking, Finance and Investment , 35 Commerce, Management, Tourism and Services , 1402 Applied Economics , 1501 Accounting, Auditing and Accountability , 1502 Banking, Finance and Investment , Accounting , 3501 Accounting, auditing and accountability , 3502 Banking, finance and investment , 3801 Applied economics
Accounting and Finance, ISSN: 0810-5391 (Print); 1467-629X (Online), Wiley, 63(2), 2109-2143. doi: 10.1111/acfi.12951
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