An investigation of regulatory and voluntary environmental capital expenditures

This paper investigates the firm-specific economic consequences of regulatory and voluntary environmental capital expenditures. Using firm-level environmental data, I decompose total environmental capital expenditures into estimates of regulatory and voluntary components. I then examine the relations of regulatory and voluntary environmental capital outlays with future abnormal earnings, stock prices, and stock returns. As predicted, the empirical analysis reveals that regulatory environmental capital expenditures are negatively associated with future abnormal earnings. Moreover, market-based tests indicate that the regulatory component of environmental capital expenditures is negatively priced. Finally, the results suggest that voluntary environmental capital expenditures and regulatory environmental capital expenditures have different firm-specific economic consequences.