• Lenders follow the herd: Two consistent findings emerged from the bank-spread analyses: First, firms with more environmental concerns were linked with smaller loan syndicate sizes (a syndicate is made up of several banks that pool together to fund firms for specific projects, requests for debt financing, etc.). This implies a higher number of lending institutions will refuse to participate in the financing of a company they deem to be environmentally risky. Second, those firms with a number of environmental concerns who still received bank financing had a higher ICC via increased cost of debt; this is consistent with the notion that banks demand higher loan spreads in order to hedge reputation and litigation risk.
Companies involved in risky environmental operations must be acutely aware of all market players, and not concern themselves solely with shareholder interest. Debt financing is an important part of the borrowing firm’s capital structure, and often a critical player in project financing. The final takeaways from the case study are that lenders will reward for certain behaviours while investors generally do not, but both lenders and investors punish for bad behaviours by divesting or charging higher return rates, all of which threatens the delicate ratio between debt and equity cost of capital. Because while the effects of market players’ behaviour may not initially seem so grave, they have can have serious impacts on next quarters’ balance sheet. 3.1.2 PERCEIVED ENVIRONMENTAL RISK: CASE STUDY In this second cast study, we examine a study by Vasi and King (2012) that says social activism, both against a company that has done something environmentally damaging and from within a company that increases perceived risk of environmental crisis can translate into greater risk of financial loss for the firm. But the costs at stake are not necessarily risks of minor loss – depending on how your shareholders react, it could be to the tune of tens of millions. As investors become increasingly aware of the repercussions of a environmentally damaging activities, it has resulted in increased attention to corporate social responsibility, national eco-legislation, and a push to “green” the business world. The pervasive and fallible theory that companies are “too big to …show more content…
The reason for this is because it is the perception of this community of stakeholders alone that has been shown to have the greatest impact on shareholder and investor relations. Thus irrespective of observable environmental hazards, crisis or damages incurred, a company’s key stakeholder views and perspectives were more important to, and a better predictor of, the financial outcome of a firm. Thus perceived environmental risk does not necessarily measure how eco-friendly a company is. It also does not measure the impact of the firm’s activities on the environment around them.
With this in mind, Vasi and King sought to answer two important questions:
1. To what extent does environmental activism directed towards a company affect its perceived environmental risk?
2. How much does environmental activism raise flags to your stakeholders such that your financials are impacted, and to what extent?
The authors used a 5-year data set of the top 700 US firms from 2004 to 2008. With these data, they measured two dependent variables: a) analysts’ perceptions of a firm’s environmental risk; and b) the firm’s Tobin’s Q (a company’s book to market value ratio). Perceived risk was calculated by incorporating a rating system that included
Companies involved in risky environmental operations must be acutely aware of all market players, and not concern themselves solely with shareholder interest. Debt financing is an important part of the borrowing firm’s capital structure, and often a critical player in project financing. The final takeaways from the case study are that lenders will reward for certain behaviours while investors generally do not, but both lenders and investors punish for bad behaviours by divesting or charging higher return rates, all of which threatens the delicate ratio between debt and equity cost of capital. Because while the effects of market players’ behaviour may not initially seem so grave, they have can have serious impacts on next quarters’ balance sheet. 3.1.2 PERCEIVED ENVIRONMENTAL RISK: CASE STUDY In this second cast study, we examine a study by Vasi and King (2012) that says social activism, both against a company that has done something environmentally damaging and from within a company that increases perceived risk of environmental crisis can translate into greater risk of financial loss for the firm. But the costs at stake are not necessarily risks of minor loss – depending on how your shareholders react, it could be to the tune of tens of millions. As investors become increasingly aware of the repercussions of a environmentally damaging activities, it has resulted in increased attention to corporate social responsibility, national eco-legislation, and a push to “green” the business world. The pervasive and fallible theory that companies are “too big to …show more content…
The reason for this is because it is the perception of this community of stakeholders alone that has been shown to have the greatest impact on shareholder and investor relations. Thus irrespective of observable environmental hazards, crisis or damages incurred, a company’s key stakeholder views and perspectives were more important to, and a better predictor of, the financial outcome of a firm. Thus perceived environmental risk does not necessarily measure how eco-friendly a company is. It also does not measure the impact of the firm’s activities on the environment around them.
With this in mind, Vasi and King sought to answer two important questions:
1. To what extent does environmental activism directed towards a company affect its perceived environmental risk?
2. How much does environmental activism raise flags to your stakeholders such that your financials are impacted, and to what extent?
The authors used a 5-year data set of the top 700 US firms from 2004 to 2008. With these data, they measured two dependent variables: a) analysts’ perceptions of a firm’s environmental risk; and b) the firm’s Tobin’s Q (a company’s book to market value ratio). Perceived risk was calculated by incorporating a rating system that included