B-school researchers find green companies have lower cost of capital. Plus, thoughts of death and cookies, and a reason to give a firm handshake
New research from the University of Oklahoma's Price College of Business shows that for companies being green might not be easy, but it can pay by lowering their cost of capital.
Mark P. Sharfman, professor of strategic management, and Chitru Fernando, the Michael F. Price Professor of Finance at Price and a visiting professor at Southern Methodist University's Cox School of Business, teamed up to study market reaction to green initiatives at 267 S&P 500 companies. They suggest that investors factor in improved management of environmental risks when evaluating companies, resulting in lower risk premiums on equity and higher levels of leverage for the firms, lowering the companies' overall cost of capital.
Favorable Press Coverage
Often, companies look internally to see the benefits of their efforts to help the environment—such as becoming more efficient users of resources. But the professors found that financial markets, particularly equity markets, also reward green efforts. These green firms tend to have higher costs of debt, but that's partly because they are permitted to carry more debt, which reduces tax burdens, according to the research. "Such increased amounts of debt also should allow firms to 'leverage' up their return on equity," according to a brief the researchers wrote about their work, which appeared in its entirety in the Strategic Management Journal in June.
In addition, when a company improved its environmental performance, it attracted a higher level of ownership among individual investors, which lowered the cost of its equity capital. As a result, stocks of these companies are high performers and investors see them as less risky investments because going green often means reducing government penalties, the number of possible accidents, and therefore the threat of lawsuits. "It's pretty clear to anyone looking at the research that if [firms] lower environmental risks, they'll be able to raise equity capital more cheaply," says Fernando. "Obviously if cost of capital goes down, it's a great benefit."
The researchers also say that there is evidence that companies also benefit from the good press they receive for their green efforts, but they have not yet confirmed this with a study. They are, however, replicating the study they conducted in the U.S. by looking at about 950 companies worldwide to see if green efforts get the same kind of reaction from markets abroad. Also, the duo will look at market reaction to companies that are specifically addressing climate change.
They say their purpose is a practical one. "We've broadened the ability of firms to make an argument for environmental efforts," says Sharfman.
Death and Cookies
Thoughts of death may spur you to shop until you drop and overeat, according to research recently conducted by professors at the RSM Erasmus University in the Netherlands and Arizona State University's W.P. Carey School of Business.
Motivated by reports showing a high level of consumerism in the U.S., especially on luxury items and food, immediately following 9/11 (BusinessWeek.com, 1/17/08), Dirk Smeesters, associate professor at Rotterdam, and his partner Naomi Mandel, marketing professor at Carey, set out to determine if thoughts of death trigger the need to consume.
In the August Journal of Consumer Research, the researchers explain that, among other things, people exposed to the idea of their own death ate more cookies and bought more stuff. The researchers split up participants into two groups and gave each a writing assignment. The participants of one group wrote an essay about the emotions they experienced when thinking about their own death and what they would physically experience when dying, while the other group wrote about undergoing some sort of medical procedure.
Afterward, the participants in both groups chose items they would buy from a prepared grocery list that included essential and nonessential products. Those who had written about their own mortality chose to buy significantly more items than those who wrote about the medical procedure. They also bought more nonessential items. In another study, the researchers had participants eat cookies for a fictitious taste test after writing the various essays, and those with death on the brain ate significantly more cookies.
Participants who had low self-esteem binged more after contemplating death than those with high self-esteem, according to the study. Smeesters says the discoveries he and his partner made teach consumers more of a lesson than they do companies. "People are not aware of what affects their behavior," he says, adding that people might consider refraining from watching the evening news over dinner, lest they overeat.
Hiring on a Handshake
A firm handshake might be the difference between getting the job and not getting it, according to a recent study from the University of Iowa's Tippie College of Business that is scheduled to appear in an upcoming issue of the Journal of Applied Psychology. With an interest in finding out what happens in a job interview and why an interviewer decides early on whether to hire a person, Greg L. Stewart, professor of management at Tippie, had 98 students come in for mock interviews with real employers.
Without telling the students, he had the interviewers evaluate their handshakes. He had them rate the quality of the handshake independent of the job interview and then analyzed the relationship between the two. Those with firm handshakes were more likely to get the job.
What Stewart confirmed was that handshakes matter. "I don't think people necessarily remember the handshake," says Stewart. "I think it's a good signal of other things." He adds that extroverted people were more likely to have firm handshakes.
In addition, women, on average, have less firm handshakes than men, but they do as well or better in interviews. Therefore, says Stewart, women who have a firm handshake get more out of it than men in the job interview.
The lesson for all job hunters is to work on your handshake (BusinessWeek.com, 6/28/05) and other social skills, says Stewart. His research is now focusing on what drives initial impressions in interviews.