The Importance Of Environmental Risk
Companies involved in risky …show more content…
The pervasive and fallible theory that companies are “too big to fail” is a dangerous train of thought for corporate giants; they are not especially immune to the negative effects of perceived environmental risk. Vasi and King’s (2012) study provides an test of the delicate relationship between environmental risk and financial loss, and demonstrates that the two are positively …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