The Green Geography: Corporate Environmental Policies and Local Institutional Investors

Corporate environmental concerns (i.e., weaknesses) are spatially clustered, unlike environmental strengths. Firms headquartered in cities friendlier towards the environment (“green” cities) are less likely to have environmental concerns. Manufacturing facilities operated by such firms pose lower risks of toxic releases, even when the facilities are located in less environmentally friendly areas. This higher sensitivity to environmental performance is mirrored by investors. Institutional investors located in “green” cities do not overweight local firms with environmental concerns, unlike those in other cities who hold disproportionately more local stocks in their portfolios regardless of corporate environmental policies. Consistent with this asymmetric preference, firms with environmental concerns experience poor future stock performance and receive lower market valuations if they are located in “green” cities. We conclude that local environmental norms and preferences influence corporate policies, ownership structure, and valuation.