Can Capital Markets Create Incentives for Pollution Control?
) Benoit Laplante Maité Roy Abstract It has been observed that upon trading-off the costs and benefits of pollution control, profit-maximizing firms may choose not to invest their resources in pollution abatement since the expected penalty imposed by regulators falls considerably short of the investment costs. Regulators have recently embarked on a deliberate strategy to release information to markets (investors and consumers) regarding firms’ environmental performance in order to enhance incentives for pollution control. In this paper, we analyze the role that capital markets may play to create such incentives. Evidence drawn from American and Canadian studies indicates that capital markets react to the release of information, and that large polluters are affected more significantly from such releases than smaller polluters. This result appears to be a function of the regulator’s willingness to undertake strong enforcement actions as well as the possiblity for capital markets to rank
