Does environmental performance improve market valuation of the firm: evidence from Indian market

Current regulatory mechanism is costly and ineffective due to weak enforcement of environmental standards in India. Harnessing the capabilities of capital markets could be a better strategy for environment friendly economic growth. Therefore, the paper aims to examine a relationship between a firm’s environmental performance and its market valuation. The study uses market value as an indicator of the financial performance using the Ohlson (Contemp Account Res 11:661–687, 1995) model, which is a better indicator in an emerging economy compared to Tobin-q and is free from the biases that Tobin-q suffers from. The study finds a positive relationship between the number of voluntary environment program implemented by a firm and its market value and significant negative relationship between a firm’s market value and pollution index. However, the relationship between resource use index and market value is not found to be statistically significant. The study indicates that India could harness the power of capital markets for improving industrial environmental performance. © 2017, Society for Environmental Economics and Policy Studies and Springer Japan KK.