The Effect of Green Announcements on Stock Returns of New Zealand Listed Companies

The purpose of this paper is to investigate the effect of corporate green announcements on the stock performance of listed companies in New Zealand. We find that the market has a positive, though not significant, reaction to the announcements. New Zealand companies are largely viewed to be already quite green at the onset and the market is not very much surprised by such announcements but expect them to continue being green. Our results are consistent with the view that to be green is costly, especially so in a developed economy where the cost of doing business is high. Our findings underscore the importance for corporate managers in New Zealand that, while any positive green announcements that they make might not have a significant market reaction, they are nonetheless positive.

To this end, companies in New Zealand had already begun to consider programs that promote clean and efficient renewable energy. The UN's 7th sustainable development goal is to promote affordable and clean energyenergy that is more sustainable and widely available.
With an increasing awareness of environmental problems in society, consumers and investors demand companies to take more social responsibilities for their business (Kruger, 2011 [1]). Under such external pressure, firms have to think about whether it is worth paying extra cost to go green. The debate of "is it worth being green" has been argued many times. Some may still consider that going green is costly and will be expensive than traditional products with similar functions. However, it is difficult to measure the cost of going green by the exact dollar amounts spent. The benefits could be found in many different areas and sustainable in the long term. A simple example in our daily lives is, an energy saving light bulb may cost a little bit more than a normal one, but it could save more energy cost and thus provide savings in power bills for the long term (Green Experience, 2011 [2]). Fortunately, many countries have realized the increasing importance of the environmental issue. Both the government and the public have been paying greater attention on environmental protection and the reduction of harmful effects on the environment (UNIDO, 2010 [3]). But how does the investing public, particularly share investors, view and react to such initiatives?
There are a several perspectives for companies' green activities. Some may believe it can improve the efficiency in operating and increase corporate reputation which could generate more benefits, while others may consider expenditures on the environment as a burden that would decrease companies' competitive advantage (Hart & Ahuja, 1996 [4]). In most situations, companies' green activities cost money directly and reduce revenues simultaneously, which may lead to a decrease in future cash flows. As the stock price is based on future cash flows, investors may worry about the negative impact on the stock price. However, even though the cash flow per unit may decrease, consumers generally welcome corporate green behavior and are more likely to buy green products as they may not mind paying a little more for them. Thus, it is expected that total sales revenues would increase to the extent that it could more than cover the extra costs of going green. This paper studies the effects of environmental components on companies' equity value through the testing of stocks' abnormal returns from green announcements. The insights drawn from the present study are particularly enlightening for a small but developed economy such as New Zealand, as prior studies are centered mostly on much larger economies such as the USA or Australia. It is particularly interesting to study New Zealand as Kumar and Khanna (2009 [5]) find that it is one of only three countries (together with Ireland and Luxembourg) that ranked in the highest tier group with an environmentally binding production technology. Their study of the environmental efficiency and productivity of 38 countries considers the reduction of each country's carbon emission.
The definition of "green" within this study is not simply the substitution for things that are "environmental." It includes any issues that have a health effect on living things (Richmond, 2007 [6]). In our daily lives, everyone can go green easily. For example, driving less or using public transportation more regularly can reduce the carbon emission which is harmful to humans and the global environment. Ding, Ferreira, and Wongchoti (2016 [7]) show that the value impact of corporate social responsibility (CSR) activities (including environmental issues) relies J Sustain Res. 2020;2(4):e200037. https://doi.org/10.20900/jsr20200037 heavily on the industry-specific relative position of the firm. Only firms that distinguish themselves over their peers are associated with increased firm value. Their finding is robust and holds for both responsible and irresponsible behaviors.
What is a green announcement? This paper defines green announcements as those that are announced officially by company's CEO or top executive. It includes: 1. Announcements of emission/pollution reduction in air, water or land.
2. Announcements of waste reduction or recycling activities.
3. Announcements on the use of efficient alternative energy sources. 4. Announcements of investing in or sponsoring of green programs.

Announcements of signing of environmental agreements.
New Zealand is one of most eco-friendly countries in the world (Kumar & Khanna, 2009 [5]) where its residents have a strong environmental consciousness. This consciousness would be reflected by their stock market reaction to specific events of green announcements made by listed companies on the New Zealand Stock Exchange (NZX). We therefore examine the impact of green announcements on the companies' stock performance.
The remainder of this article is organized as follows. Section A survey by Nation's Business (1993 [9]) documents that 86% of readers believe firmly the importance of ethics for a company's financial performance, 11% consider there are more or less important and only 3% doubt the importance of ethics to financial performance. The survey results imply that the public requires firms to behave ethically and that unethical behavior would be costly to the firm. In fact, many companies do not consider "green issues" as cost terms. Excellent pollution control and prevention tend to conserve installation and operating costs; it also leads to a more efficient production process (Young, 1991;Schmidheiny, 1992 [10,11]). However, it is complex to explain whether the financial performance of companies is influenced by ethical or unethical behavior (Wood, 1994 [12]). Within the firm, production and process efficiency can be influenced by the ethical or unethical behavior of managers and employees (Sen, 1993;Hamilton, 1995;Hamilton & Strutton, 1994 [13-15]).
Externally, stakeholders such as customers, suppliers, and debt holders could impact companies' financial performance as well.   [27]) believe that companies with a high level of corporate social responsibility will attract more opportunities in the market and appeal to higher quality human resources. It is also possible that the market does not react on such announcements. Based on the mixed findings of previous studies, this article investigates the following hypotheses: Hypothesis 1: Green announcements have no effect on companies' stock returns.

Methodology
We use a standard event study methodology (Brown and Warner,

[33]
). First, we take note of the date of green announcements by the companies and use a 61-day event window around the announcement day with 30 days before and after it. We then compute the average abnormal returns (AARs) and cumulative abnormal return (CAARs) relative to a 120day estimation period prior to the event window and test their statistical significance. Day 0 is defined as the company's official announcement day.
If an announcement occurs after the end of a trading day or during the weekend or a public holiday, the next trading day is considered day 0.
We consider the market model where Rjt is the return of stock j at day t, αj is the constant term, βj is the slope which measures stock j's sensitivity to a change in the market return, and εt is the error term on day t. The abnormal return of stock j on day t is defined as the difference between the actual and expected return: where ARjt is the abnormal return of stock j on day t, Rjt is the actual return of stock j on day t, andRjt is the estimated return of stock j on day t. We compute the average abnormal return on day t as where AARjt is the average abnormal return of N stocks on day t, The cumulative average abnormal returns (CAAR) is then defined as where CAARab is the cumulative average abnormal returns from day a to day b.
We use the following t-test to test the significance of the AAR.
where S is the estimated standard deviation of abnormal returns during the estimation period. To test for the significance of the CAAR over any period from day a to day b before, around, and after the announcement day, the following test statistic is employed.
ab ab CAAR t S X = (6) where X is the number of days from day a to day b.
J Sustain Res. 2020;2(4):e200037. https://doi.org/10.20900/jsr20200037 Tables 1 and 2 show the summary statistics of the event study and our sample data. The sample includes 30 green announcements made by nine companies from eight different industries. Table 3 shows the average abnormal returns (AAR) and cumulative average abnormal returns (CAAR) with their corresponding t-statistics. It also provides the number of positive and negative AARs on each day. The abnormal return on announcement date is small, and both AAR and CAAR are not statistically significant.

RESULTS AND DISCUSSIONS
The results in Table 4 concur with those in Table 3        A final contributory reason for this paper's findings is that New Zealand is well known as a country with a high degree of awareness of environmental and sustainability issues, as pointed out earlier. It has very strict resource consent and building code requirements that incorporate several green practices into legal requirements. There are also strict guidelines on the use of natural resources. As such, asset expansion programs of companies must have already met certain green practices or obtained the necessary government approvals before embarking on them.
Thus, specific green announcements by a firm as defined in this article may lead to a reduced impact on its stock returns.

CONCLUSIONS
The purpose of this paper is to investigate the effect of corporate green announcements on the stock performance of listed companies in New Zealand, which is a small developed economy. We find that the market has a positive, though not significant, reaction to such announcements. We interpret this to mean that New Zealand companies are viewed to be already quite green at the onset. As such, the market is not very much The findings of this study underscore the importance for corporate managers in New Zealand that, while any positive green announcements that they make might not have a significant market reaction, they are nonetheless positive. On the contrary, any green report that is negative would likely have a negative market reaction.
We acknowledge the data limitation of our study. It is recommended that future research should consider a larger sample that includes both positive and negative announcements when more of such information becomes available. It would also be nice to conduct a similar study on J Sustain Res. 2020;2(4):e200037. https://doi.org/10.20900/jsr20200037 other countries, both developed and developing, that may be considered "green" to see if the conclusions are similar.

DATA AVAILABILITY
The dataset of the study is available from the authors upon reasonable request.

CONFLICTS OF INTEREST
The author declares that there is no conflict of interest.