The “Green” Geography: Firm Location and Corporate Environmental Policies

Corporate environmental policies have a substantial geographical element. There is a large variation of the presence of environmental concerns across firms in different U.S. cities, which cannot be explained away by various firm characteristics or industry trends. This variation is related to some regional characteristics. Firms located in areas with higher prevalence of political corruption are more likely to have environmental concerns, while firms located in “green” cities – which are friendlier towards the environment – are less likely to have environmental concerns. Institutional investors in green cities are more sensitive to the environmental policies of their local firms. Unlike investors in other areas who hold disproportionately more local stocks regardless of corporate environmental policies, these investors do not overweight local firms with environmental concerns. Consistent with this investor preference, firms with environmental concerns that are located in green cities have lower valuations. Such firms tend to camouflage concerns with strengths, but this practice does not appear successful in mitigating local investors’ aversion in green cities. Our results are consistent with local environmental norms and preferences influencing corporate policies and valuation.