the impact of air pollution emissions and related human health risks on the cross-section of stock...
TRANSCRIPT
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THE IMPACT OF AIR POLLUTION THE IMPACT OF AIR POLLUTION EMISSIONS AND RELATEDEMISSIONS AND RELATED
HUMAN HEALTH RISKS ON THEHUMAN HEALTH RISKS ON THECROSS-SECTION OF STOCK RETURNSCROSS-SECTION OF STOCK RETURNS
Dinah A. KoehlerDinah A. KoehlerEPAEPA
Bernell K. StoneBernell K. Stone
BYUBYU
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CONCERNCONCERN
For a cross section of companies/industries, does air pollution,
especially health damaging air pollution,have a systematic effect on valuation?
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HYPOTHESESHYPOTHESES
Null: no effect
Alternative l: Positive effect, i.e.: More pollution greater value
Alternative 2: Negative effect, i.e.:
More pollution lower value
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Comments:
1. In equilibrium, value and return realization are inversely related.
2. Revaluation from new information and/or from changes in how stocks are valued can be source of noise, possibly distortion.
Pollution
Ret
urn
Fair
Pollution
Ret
urn
Fair
Pollution
Ret
urn
Fair
Null
HYPOTHESESHYPOTHESES
Positive
Negative
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ASSESSMENT ISSUESASSESSMENT ISSUES
• Fair return for time and risk
• Other cross-sectional return dependency variables
• Interpretative complexities
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FAIR RETURN MODELSFAIR RETURN MODELS
CAPM (Capital Asset Pricing Model)2 return factors:
- time (short-term riskless interest rate)- systematic market risk (beta)
Rs = Rf + (RM - Rf)βs
Multifactor- Endogenous Factors (APT)- Exogenous Factors (specified variables) Example: “Fama-French 3 Factor”
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OTHER CROSS SECTIONAL OTHER CROSS SECTIONAL RETURN DEPENDENCY RETURN DEPENDENCY
VARIABLESVARIABLES
• Other so-called anomaly variables
• Taxes and financial structure
• Growth, profitability, and other performance attributes
• Industry
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Summary of Return Impacting Variables
VARIABLE NAME SYMBOL VARIABLE DEFINITION
Beta = Cov(Rs-Ro, RM – Ro) / Var(RM – Ro) measured over 3 years of past monthly returns, where Ro is the riskless
rate and RM is the market index.
Book-to-Market ratio B2M Ratio of BV/MV where BV is accounting book value (total common equity) and MV is market value of common stock
Market Cap (Market Value)
MV The market value of common stock at a point in time
Earnings Yield EY The ratio of Net Income to market value, the reciprocal of the price-earnings ratio
Dividend Yield DY The ratio of Annual Dividends to Market Value
Financial Structure FS The fraction of Total Investment provided by debt and preferred stock
Effective Tax Rate ET The ratio of Tax Payments to Net Income
Return on Investment ROI The ratio of Operating Income (before extraordinary income and expenses) to Total Investment
Return on Equity ROE The ratio of Net Income to Book Value
Sales Intensity SI The ratio of Sales to Total Investment
Sales Growth SAG Five-year average sales growth
Average Margin AM The Ratio of Operating Income to Sales
Sustainable Growth SUG The growth of common equity from retained earnings
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INTERPRETATIVE INTERPRETATIVE COMPLEXITIESCOMPLEXITIES
The usual specification problems– Measurement error– Omitted variables– Improperly specified functional dependencies– Correlation distortion
State of the economyState of the market
– Changing level of interest rates – Changing term structure– Changing currency values– Hot and cold styles (e.g., growth vs value)
Industry-specific effectsArrival of new value changing information
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STUDY LOGICSTUDY LOGIC
DATA
1. Rank Order into Industry Portfolios2. Step-Wise use of MAP
Scatter PlotsRegression Fits
Hypothesis Tests
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STUDY LOGICSTUDY LOGIC
DATA
1. Rank Order into Industry Portfolios2. Step-Wise use of MAP
Model 1: No control restrictionsModel 2: CAPM betaModel 3: Fama-French 3-FactorModel 4: 7-Factors: EY, DY, FS, ETModel 5: Add Growth and Profitability
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STUDY LOGICSTUDY LOGIC
DATA
1. Rank Order into Industry Portfolios2. Step-Wise use of MAP
Scatter PlotsRegression Fits
Hypothesis Tests
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Measured Cross Section of Returns Measured Cross Section of Returns on Matched Portfolioson Matched Portfolios
y = -0.0244x + 0.2034
R2 = 0.1621
-0.2
-0.1
0
0.1
0.2
0.3
0.4
-3.5 -1.5 0.5 2.5 4.5 6.5log kg
1998
-200
2 Por
tfolio
Retu
rn
Figure 1 y = 0.0049x + 0.1497R2 = 0.0135
-0.1
0
0.1
0.2
0.3
-6 -4 -2 0 2 4log kg/va
1998
-200
2 Po
rtfoli
o Re
turn
Figure 2
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Measured Cross Section of Returns Measured Cross Section of Returns on Matched Portfolioson Matched Portfolios
y = -0.3059x - 0.4848R2 = 0.5567
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
-3.5 -3 -2.5 -2 -1.5 -1log total pm2.5 risk/VA
1998
-200
2 Po
rtfoli
o Re
turn
Figure 4
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Measured Cross Section of Returns Measured Cross Section of Returns on Matched Portfolioson Matched Portfolios
•
y = -0.314x - 0.5059R2 = 0.591
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
-3.5 -3 -2.5 -2 -1.5 -1log total TRI + pm2.5 risk/VA
1998
-200
2 P
ortfo
lio R
etur
n
Figure 5
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Linear Regression Results: 1998-2002Linear Regression Results: 1998-2002LOG [KILOGRAMS DIRECT MASS EMISSIONS]
Model Coefficient T-value F-value R2
1 -0.02 -1.28 1.63 0.14
2 -0.03 -1.63 2.65 0.21
3 -0.03 -1.74 3.03 0.23
4 -0.01 -0.32 0.10 0.01
5 -0.02 -1.39 1.93 0.16
LOG [DIRECT KG/VA]
Model Coefficient T-value F-value R2
1 -0.0272 -1.8042 3.2552 0.2656
2 -0.0226 -1.2258 1.5026 0.1431
3 -0.0179 -1.0864 1.1803 0.1159
4 0.0070 0.4533 0.2055 0.0223
5 0.0049 0.3508 0.1231 0.0135
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Linear Regression Results: 1998-2002Linear Regression Results: 1998-2002LOG [TOTAL TRI RISK/VA]
Model Coefficient T-value F-value R2
1 -0.23 -1.98 3.92 0.23
2 -0.15 -1.48 2.20 0.14
3 -0.17 -1.67 2.80 0.18
4 -0.30 -5.01** 25.10** 0.66
5 -0.31 -4.08* 16.65* 0.56
LOG [TOTAL PM2.5 RISK/VA]
Model Coefficient T-value F-value R2
1 -0.21 -2.42 5.84 0.29
2 -0.16 -1.84 3.39 0.19
3 -0.15 -1.88 3.55 0.20
4 -0.27 -3.21* 10.32* 0.42
5 -0.31 -4.19** 17.58** 0.56
* p < .01 ** p < .001
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Linear Regression Results: 1998-2002Linear Regression Results: 1998-2002
LOG [(TOTAL TRI + PM2.5 RISK) / VA]
Model Coefficient T-value F-value R2
1 -0.23 -2.54 6.44 0.32
2 -0.18 -2.12 4.50 0.24
3 -0.14 -1.78 3.18 0.19
4 -0.25 -3.07* 9.40* 0.40
5 -0.31 -4.50** 20.23** 0.59
* p < .01 ** p < .001
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MAJOR CONCLUSIONSMAJOR CONCLUSIONS
• Tonnage of air pollution is not significant
• Cancer health risk is significant
• Lung health risk is significant
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INTERPRETATIVE COMPLEXITY:INTERPRETATIVE COMPLEXITY:EQUILIBRIUM VS REVALUATIONEQUILIBRIUM VS REVALUATION
“Equilibrium” (no pollution-related revaluation)-market failure in that companies in industry groups producing more health damaging air pollution are more highly valued than otherwise identical companies-there is a need for pertinent regulation
Cross-time revaluation-the market believes that there is the possibility that health-related air pollution will be more regulated (with costs to the polluting companies), and/or -the market becomes concerned with health-related legal liability (as occurred for asbestos and tobacco)
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METHODOLGY CONCLUSIONSMETHODOLGY CONCLUSIONS
Many variable impacts
For pollution, it is crucial to control for– Fair return for time and risk– Taxes and financial structure– Growth and profitability– Industry attributes
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ON-GOING AND FUTURE ON-GOING AND FUTURE RESEARCHRESEARCH
Size scaling alternatives
Outlier control
Industry impacts/distortion
More portfolios per cross-section
More sensitivity analysis
Additional years?