Environmental and Resource Economics

, Volume 45, Issue 3, pp 353–377 | Cite as

Does the Porter Hypothesis Explain Expected Future Financial Performance? The Effect of Clean Water Regulation on Chemical Manufacturing Firms



Previous research provides opposing theoretical arguments regarding the effect of environmental regulation on financial performance. As one important argument, the Porter hypothesis claims that tighter regulation improves financial performance. This study provides empirical evidence on this debated effect. In particular, we employ panel data analysis to examine the effect of Clean Water Act regulation, as measured by permitted wastewater discharge limits, on expected future financial performance, as measured by Tobin’s q, for publicly owned firms in the chemical manufacturing industries. We find that tighter permitted discharge limits lower Tobin’s q; i.e., more stringent Clean Water Act regulation undermines expected future financial performance. By decomposing Tobin’s q into its constituent components—market value and replacement costs—and estimating each component separately, we find that tighter permitted discharge limits lower both components with a larger impact on market value, which implies that investors revise their expectations of the discounted present value of future profits in response to changes in Clean Water Act regulation.


Chemical industry Firm performance Porter hypothesis Regulated industries Regulation 

JEL Classification

L25 L51 


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Copyright information

© Springer Science+Business Media B.V. 2009

Authors and Affiliations

  1. 1.PricewaterhouseCoopersLos AngelesUSA
  2. 2.Department of EconomicsUniversity of KansasLawrenceUSA

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