0
The Effect of Green Marketing Strategies on
Short-Term Firm Value. An Event Study.
1
The Effect of Green Marketing Strategies on Short-Term
Firm Value. An Event Study.
Author Laura Wüstenberg Student Number 1953028 Saffierstraat 242 • 9743 LP Groningen L.W.Wustenberg@student.rug.nl • +31 (0) 633790194 University of Groningen
Faculty of Economics and Businesses, Department of Marketing
Master Thesis MSc Business Administration - Marketing - Marketing Research September 2011
I
Executive Summary
II
Preface
After almost two decades of being a scholar, this master thesis eventually demonstrates the knowledge I have gained throughout my school years, bachelor and master studies. I would like to take the opportunity to thank my first supervisor Dr. Jenny van Doorn for her constructive feedback that brought out the best of me and this thesis. I would also like to thank Sander Beckers for his supportive assistance in understanding the process of event study methodology and for assessing this thesis as my second supervisor.
Laura Wüstenberg
III
Table of Content
Executive Summary ... I Preface ... II
1 Introduction ... 1
2 Current State of Academic Literature ... 5
2.1 Key Definition of Green Marketing ... 5
2.2 The Effect of Green Marketing on Consumer Behavior ... 7
2.2.1 Moderating Effects ... 9
2.2.2 Mediating Effects ... 10
2.3 The Effect of Green Marketing on Financial Firm Performance ... 10
2.3.1 Moderating Effects ... 12
2.3.2 Mediating Effects ... 13
3 The Impact of Green Marketing on Firm Performance ... 15
3.1 Conceptual Model ... 15
3.2 Hypotheses ... 18
4 Research Methodology ... 25
4.1 Event Study Methodology ... 25
4.2 Tests of Significance ... 27
4.3 Sample and Data Collection ... 28
4.4 Operationalization of Measurement ... 30
5 Results ... 32
5.1 The Main Effect of Green Marketing ... 32
5.2 Moderating Effect of Type of Green Marketing and Corporate Reputation ... 34
6 Discussion ... 40
6.1. Summary and Discussion of Findings ... 40
6.2. Implications for Managers and Marketers ... 43
IV
7 Conclusion ... 46
References ... i
Appendix A: Overview of Entire Sample ...ix
Appendix B: Robustness Check using interval Scale for Corporate Reputation ... xiii
Appendix C: Robustness Check using Number of Employees ... xiv
1
1
Introduction
Nowadays, companies are increasingly confronted with the challenge to act profit oriented and socially responsible simultaneously. Economic actions of especially large and medium sized firms attract more and more public interest due to their influence on the environment. Companies are not only assigned rights but also duties and stakeholders like employees, suppliers, customers and government are all placing demands on organizations. No wonder, that topics such as business ethics, sustainability and corporate social responsibility (CSR) are receiving more and more attention in the boardroom in general and of the CEO in particular (Mascarenhas, 2009). Management is increasingly evaluating the firm’s performance according to the triple-bottom line concept coined by Elkinton (1998). This concept reflects the rising tendency of stakeholders to evaluate a company’s sustainability on three dimensions – financial performance, environmental quality and social integrity (Cronin, Smith, Gleim, Ramirez & Martinez, 2010; Mark-Herbert & von Schantz, 2007).
2
managers does not have a significant effect at all. However, other studies have shown that organizations with a green orientation are likely to accomplish superior financial revenues and stock returns (Menguc & Ozanne, 2005) and better overall firm performance (Pujari, Wright & Peattie, 2003). Cronin et al. (2010) have examined all prior research regarding the effect of green marketing strategies on a firm’s stakeholders. Based on the inconsistence of past research results and on gaps in literature, they identified numerous potential research opportunities. The authors especially suggest to further investigate the link between green marketing strategies and firm performance. From their point of view, it is obvious that companies might benefit from green marketing, but a more thorough and systematic analysis of the relationship is needed. This especially holds when marketing is increasingly challenged to assess and to articulate the return of its actions for shareholders (e.g. Lemon, Rust & Zeithaml, 2001; Srinivasan & Hansen 2009; Wiesel, Skiera & Villanueva, 2008). More precisely, there is the general trend that marketing’s influence on the corporate strategy level is more and more decreasing (McGovern, Court, Quelch & Crawford, 2004; Nath & Majahan, 2008;). In order to regain accountability within a firm and to demonstrate marketing’s contribution to firm value, marketers need to show that green marketing strategies can increase shareholder value and under what particular circumstances.
3
have an effect on the relationship between green marketing and short-term firm performance. Yet, there is evidence that corporate reputation moderates the effect of green marketing on consumer behavior (Picket-Baker & Ozaki, 2008). Pickett-Baker & Ozaki (2008) have found that corporate reputation increases the preference for green products. One can assume that product preference further increases sales and brand equity which eventually may boost firm performance. However, there is so far no empirical evidence for this link. Hence, further investigations should examine whether corporate reputation is moderating the effect of green marketing on short-term firm performance. Interesting is also to identify whether there exist any interaction effects between the type of green marketing and the level of a firm’s reputation. One may assume that the impact of different types of strategy on short-term performance differs depending on the level of corporate reputation. A positive effect of green products for instance may be even larger for companies with a better reputation that enjoy greater trustworthiness and reliability.
4
Eventually, managerial implications are generated that help companies to decide for or against the implementation of green marketing initiatives.
5
2
Current State of Academic Literature
To get a deeper understanding of the relationship between green marketing and firm performance, this chapter will give an overview of the current state of academic literature. Section 2.1 specifies and defines the concept of green marketing based on previous studies focusing on this research topic. In the following section 2.2 the current status in green marketing research in general and its effect on consumer behavior is investigated. Section 2.4 is directly related to the research question of this paper and analyses the results of previous researches that related green marketing to firm performance.
2.1 Key Definition of Green Marketing
6
sustainability and economic efficiency. This leads to an understanding of green marketing as the integration of environmental issues into the content and process of marketing strategy (Langerak et al., 1998). Hence, green marketing strategies are those that intend to accomplish a differentiation advantage, take a pro-active position with respect to corporate environmentalism and that consider environmental concerns as a chance (Baker & Sinkula, 2005). This means that green marketing cannot only focus on managing green products with respect to functions, features and efficient manufacturing but also on meeting customer needs (Ottman, Staffort & Hartman, 2006). An overemphasis of the former at the expense of the latter can be termed "green marketing myopia" and leads eventually to less successful product adoption.
7
2.2 The Effect of Green Marketing on Consumer Behavior
Having this definition in mind, there is a large amount of literature that focuses on the relationship between green marketing strategy and consumer behavior. These studies analyze different aspects of green marketing such as buying behavior of green products (Gupta & Ogden, 2009; Pickett-Baker & Ozaki, 2008), willingness to pay (Casadesus-Masanell, Crooke, Reinhardt & Vasishth, 2009; van Doorn & Verhoef, 2011) and the effectiveness of green advertising (Hartman & Apaolaza-Ibáñez, 2009; Shrum, McCarty & Lowrey, 1995). Table 1 gives an overview over these and other studies and their most relevant results. However, the scope and the number of the current literature in this field are much broader than it can be represented here.
Authors Independent Variable
Dependent
Variable Moderators Mediators Results
Baker & Sinkula (2005) Enviropreneurial Marketing (EM) Change in market share / New product success
New product success mediates the relation of EM and market share
Market turbulence effects EM and market share, but not new product success
Luchs, Naylor, Irwin & Raghunathan (2010) Green products Product preference Product type (strong vs. gentle) /
When strength related attributes are valued, product preference for green products decreases
When gentleness related attributes are valued, sustainability of products enhances product preference Pickett-Baker & Ozaki (2008) Green products Buying behavior Product preference Individual and socioeconomic characteristics Corporate reputation /
Strength of environmental beliefs significantly affects faith in product performance compared to non-green alternative
Environmentally-friendly reputation of company increases product preference
Gupta & Ogden (2009) Green products Buying behavior Social value orientation /
Characteristics of individual social value orientation (trust, in-group identity, expectation of others’ cooperation, perceived efficacy) differentiates between “non-green” and “green” buyers
van Doorn & Verhoef (2011) Organic food products Willingness to pay Product type (vice vs. virtue) /
Vice food with organic claim is associated with lower quality leading to decreased willingness to pay
8 Table 1: Overview of Studies analyzing the effect of Green Marketing on Consumer Behavior
These studies reveal that there is a significant relationship between green marketing strategies and consumer behavior. The majority of findings indicates that green marketing may positively affect various metrics of consumer behavior (Baker & Sinkula, 2005; Casadesus-Masanell, Crooke, Reinhardt & Vasishth, 2009; Hartman & Apoalaza-Ibáñez, 2009; Picket-Baker & Ozaki, 2008; Shrum, McCarty & Lowrey, 1995). Enviropreneurial marketing for example leads to increased market share (Baker & Sinkula, 2005) and green advertising positively affects the purchase behavior of consumers (Shrum, McCarty & Lowrey, 1995). However, the remaining studies reveal that the effect of green marketing can also be negative when certain moderating factors are considered (Gupta & Ogden, 2008; Luchs, Naylor, Irwin & Raghunathan, 2010; Tanner & Wölfing, 2003; van Doorn & Verhoef, 2011). This implies that the linkage between green marketing and consumer behavior seems to depend on a variety of factors and hence, no general conclusion about the effect of green marketing can be drawn from previous studies.
Casadesus-Masanell, Crooke, Reinhardt & Vasishth (2009) Green products Willingness to pay / /
Increasing willingness to pay for organic cotton garments although the organic cotton provided no demonstrable private incremental benefits to the customer Shrum, McCarty & Lowrey (1995) Green advertising Purchase behavior Consumer attitudes Advertising & media preferences /
Green consumers are skeptical towards green advertising but green advertising may affect the purchase behavior of green consumers positively Hartman & Apaolaza-Ibáñez (2009) Green
advertising Brand image
Nature images in green brand advertising
/
Specific nature imagery in green advertising increases green brand association
Green brand associations positively influences brand image Tanner & Wölfing Kast (2003) Green food products Buying behavior Individual and socioeconomic characteristics Store type /
Green food purchase facilitated by pro-environmental attitudes, positive attitude towards fair trade, local products and by having adequate knowledge to distinguish between environmentally friendly and environmentally harmful products
9
2.2.1 Moderating Effects
Almost all studies represented in Table 1 have incorporated moderating variables. These variables can be classified into two groups: consumer attitudes and firm or product specific characteristics. The first group encompasses concepts like customer’s personal environmental attitude, social value orientation or media and advertising preferences (Gupta & Ogden, 2009; Pickett-Baker & Ozaki, 2008; Shrum, McCarty & Lowrey, 1995; Tanner & Wölfing Kast, 2003). The results show that ‘green’ and ‘non-green’ buyers differ with respect to e.g. environmental beliefs, group-identity, expectations torards other individuals and green advertising (Gupta & Ogden, 2009; Shrum et al., 1995; Tanner & Wölfing Kast, 2003). This difference moderates the success level of green marketing in the end. For ‘non-green’ consumers, the effect is often less or even not significant, whereas green marketing does have a positive effect for environmentally concerned consumers. Thereby, firms have in general no influence on whether consumers are environmentally concerned or not. Hence, those two groups can be perceived as different target groups for companies based on given consumer attributes. This means for marketers that those studies eventually may give implications about which consumer group to target in order to commercialize an already developed product.
10
green marketing and product preference. The authors found that consumers do not favor green products when they need strong performing products such as a car shampoo. For such products, green marketing has a negative effect on product preference, whereas ethical products are favored when gentle attributes are valued as it is the case with baby shampoo for example. Eventually, these studies lead to another sort of implication than the first group of studies. In this case, the results imply which strategy to pursue given certain company or product characteristics. For example, given a certain level product performance marketers can decide whether pursuing a green marketing strategy is likely to create value or not.
2.2.2 Mediating Effects
Baker & Sinkula (2005) have investigated the mediating role of new product success in determining the relationship between enviropreneurial marketing (EM) and the change in market share. Their results show that the relationship between EM and change in market share is fully mediated by new product success. The authors argue that EM is a unique resource that leads to unique capabilities like new product success. Combining new product success with a firm’s entire bundle of capabilities is translated, in turn, into a competitive advantage. This outcome opposes the results of other studies that found evidence for a direct relationship between green marketing and consumer behavior.
2.3 The Effect of Green Marketing on Financial Firm Performance
11
Mathur & Mathur, 2000). Only two studies (Mathur & Mathur, 2000; Langerak et al., 1998) concluded with insignificant financial firm performance reactions on some of the types of green marketing activities. This implies that the relationship between green marketing and firm performance is multi-faceted and seem to depend on a number of other factors. Thus, a general conclusion about the effect of green marketing strategy cannot be drawn from existing literature. Therefore, one has to elaborate further under which circumstances green marketing is likely to generate additional firm value.
Table 2: Overview of Studies relating Green Marketing to Financial Firm Performance
Authors Independent Variable
Dependent
Variable Moderators Mediators Results
Mathur & Mathur (2000)
Green
marketing Stock Price
Type of green marketing /
Negative stock price reactions on green promotion
Insignificant stock price reactions on
announcements of green products, recycling and appointments of environmental policy managers Sarkis &
Cordeiro (2001)
Environmental
efficiency Return on Sales
Type of environmental efficiency
/
pollution prevention negatively related to firm performance
end-of-pipe efficiencies negatively related to firm performance
Rennings & Rammer (2010)
Environmental
innovations Return on Sales
Environmental regulations Type of green marketing
/
Product and process innovations generated through environmental regulations create similar innovation success than normal innovations process innovations generated through environmental regulations create lower profitability due to higher costs
product innovations and innovations regarding waste reduction, recycling and resources generated through environmental regulations efficiency lead to higher profitability Fraj-Andrés, Martinez-Salinas & Matute-Vallejo (2008) Environmental marketing Profitability Sales growth Economic results Profit before tax Market share / Commercial Performance Operational Performance
relationship between environmental marketing and firm performance positively mediated by commercial performance and operational performance
environmental marketing creates competitive cost advantage and product differentiation Langerak,
Peelen & van der Veen (1998) Green marketing Business Performance Type of green marketing /
Development and commercialization of green products leads to higher business performance of firms, especially of their turnover
12
2.3.1 Moderating Effects
13
The second moderator used in previous literature is the existence of environmental regulations (Rennings & Rammer, 2010). The results show that financial firm performance does differ remarkably between regulation-driven and ‘usual’ innovations. Other sources of innovations than governmental regulations rarely have an effect on firm performance. An explanation may be the high amount of costs that are connected to process innovations that are driven by regulations. Thus, the source of green innovations has a moderating effect on the relationship between green marketing and financial firm performance. However, Rennings & Rammers (2010) research sample mostly contains of firms from the industrial manufacturing, transportation or energy sector, which generally are highly determined by political regulations. Whether this holds for other branches like consumer goods, retailers or hotels remains unclear.
Nonetheless, both concepts – type of green marketing and source of innovation – have a significant moderating effect on the relationship between green marketing and firm value in all previously mentioned studies.
2.3.2 Mediating Effects
14
15
3
The Impact of Green Marketing on Firm Performance
Based on the analysis of current academic literature, this chapter will structure and conceptualize the research objective by developing the conceptual model in section 3.1. In section 3.2, the hypotheses are established that will form the foundation for the following analysis of this study.
3.1 Conceptual Model
This study examines the relationship between green marketing and firm performance and how investors react upon announcements of green marketing strategies. To guide the further investigation, an overarching conceptual model is generated (see Figure 1). A corporate press release that announces green marketing initiatives should influence an investor’s assessment of the firm’s performance which leads to changes in the stock price. Green marketing initiatives have a large potential to succeed from a financial perspective when considering the growing number of environmentally concerned consumers (Bonini & Oppenheim, 2008). Thus, green marketing strategies represent a firm’s way to make use of new market opportunities and respond to a growing market trend. Shareholders may perceive this as a shift in strategic business orientation that can lead to a change in the competition level, image or distribution system. Specifically, environmental marketing strategies help to achieve cost and differentiation advantages (Fraj-Andrés et al., 2008). Therefore, the short-term firm performance should be directly affected by green marketing. That means for this study that stock-prices react upon the announcement of green marketing strategies.
16
classification of Cronin et al. (2010) is used for two reasons. First, their classification represents a conclusion of a vast amount of previous empirical studies as they have performed an extensive analysis of green marketing literature. One can assume that this classification exemplifies the main findings of previous research that elaborated on the practical implementation of green marketing. Secondly, the classification of Cronin et al. (2010) represents the two-sided definition of green marketing that incorporates internally as well as externally oriented types of strategy. In particular, Cronin et al. (2010) differ between three types of green marketing strategy: (1) greening the organization, (2) green innovations and (3) green alliances. The first category – greening the organization – encompasses actions with respect to waste reduction, recycling, system certification, green supply chain management and establishing a group or an individual that leads environmental initiatives on a corporate level. The second group of green innovations refers to the launch of environmentally friendly goods and services with respect to energy requirements or packaging. Eventually, the third group of green alliances contains either a partnership with a non-profit organization (NPO) or an alliance with other companies to establish and promote e.g. an industrial code of conducts. One can assume that the success level of green marketing differs for those three strategies as each strategy may have a specific cost structure. Moreover, shareholders may appreciate the announcement about green innovations over greening the organization and green alliances, because the latter ones are of a more general nature and thus less related to the value-creating functions.
17
credibility (Herbig & Milewicz, 1995; Mahon & Watrick, 2003) and the level of credibility determines to what extend stakeholders have trust in a firm’s preannouncements. This means that the trust in a company’s actions – such as green marketing – depends on its level of credibility and reputation. Furthermore, the level of trust into a firm’s green marketing announcement may have an influence on the effect of green marketing on firm performance. Hence, it can be assumed that corporate reputation influences the relationship between green marketing strategies and firm performance.
Nevertheless, the success level of green marketing strategies may also be attributed to the interplay of the type of green marketing strategy and corporate reputation. One can assume that the relationship between the strategy type and short-term firm performance depends on the value of corporate reputation, and vice versa. In an additional analysis, the main effects model will therefore be extended with a number of interaction terms.
18
Summarizing, this research postulates that green marketing strategy is directly related to short-term firm performance. In addition, this study argues that this relationship is moderated by the type of the green marketing strategy and the level of corporate reputation.
3.2 Hypotheses
Whether green marketing strategies boost or diminish firm performance is not entirely clear from the results of previous literature. According to Mathur & Mathur (2000), corporate announcements regarding green marketing are not appreciated by investors, as on average, a firm looses 3.24% of its market value in the short-run. However, this result is based on a sample of corporate news from the years 1989 to 1995 which represents a time where the green movement and the appreciation of environmentally friendly acting companies among consumers was still in the beginning and less developed as it is nowadays. Alone from 2007 to 2009, the amount of eco-friendly product launches has raised by more than 500% (Unruh & Ettenson, 2010). A more recent McKinsey study from 2007 revealed that 87% of the respondents are concerned about the social and environmental impact of the products they consume (Bonini & Oppenheim, 2007). Consequently green marketing strategies have a large potential to improve a firm’s financial performance when considering the growing number of environmentally concerned consumers. When specifically targeting ‘green’ consumers via green marketing strategies, shareholders might realize that the company has
Firm Performance
Figure 1: Conceptual Model Green Marketing
Strategies
Type of Green Marketing Strategy
Corporate Reputation Control Variables
19
sincerely made the environmental movement a business priority (Mathur & Mathur, 2000). The extension of a firm’s operating field by environmental strategies represents a shift into a fast-growing market that may promise the generation of a large additional customer base and eventually an increase in market share. An explanation may be that targeting green consumers can maximize firms’ profits since environmental marketing strategies may directly affect customer loyalty and satisfaction (Crane, 2000). This means that green marketing helps to increase a firm’s commercial performance, which directly affects a firm’s economic results (Fraj-Andrés et al., 2008). Moreover, green marketing also leads to a boost in operational performance as environmental practices may improve the productivity of the resources due to reduced waste and lower costs for waste management (Hart, 1995). And this in turn is positively linked with a firm’s market value (Fraj-Andrés et el., 2008). Therefore, one can assume that green marketing strategies have a positive effect on a firm’s economic short-term performance. Based on this assumption, the following hypothesis can be stated:
H1: Announcements of green marketing strategies will result in positive stock-price reactions.
20
labeling of independent organizations (Montoro-Rios, Luque-Martínez & Rodríguez-Molina, 2008) like the Forest Stewardship Council for example. Moreover, green claims and advertising might increase customer attention and eventually lead to increased green brand associations (Hartman & Apaolaza-Ibáñez, 2009). Another explanation for the positive linkage of green product innovation and firm value lies in the firms’ capability to charge premium prices, reduce costs and thus, achieve superior turnover (Langerak et al., 1998). Green products can be perceived as e.g. being healthier than conventional products because more natural techniques with lower levels of pesticides are used in the production process (Hutchins & Greenhalgh, 1997; Schifferstein & Oude Ophuis, 1998). Therefore, consumer might be willing to pay a price premium for green products. Therefore, it can be assumed that green product innovations lead to higher firm performance. Additionally, one can assume that the effect of green product announcements differs from the effect of announcing green alliances or greening the organization. Green products denote a high level of visibility for stakeholders due to the fact that their launch is often related with green communication campaigns. And although green alliances may also be communicated, green alliances and especially greening the organization are rather internally oriented types of strategy. This means that green product launches specifically aim to increase sales, whereas green alliances and greening the organizations rather symbolize a firm’s environmental commitment (Menguc & Ozanne, 2005). Hence, the visibility of green alliances and greening the organization is lower than for green products. Moreover, the costs related to green alliances and greening the organizations cannot be easily transformed into premium prices that, in comparison, compensate the production costs of green products. Thus, it can be assumed that the effect of announcing green innovations is stronger than for announcing green alliances or greening the organization.
21
Previous research reveals that organizational efforts to ‘green’ the entire company internally have either no effect (Mathur & Mathur, 2000) or a negative effect one on firm performance (Sarkis & Cordeiro, 2001). Announcing the establishment and regular meetings of a group that leads environmental initiatives on a corporate level does not affect a firm’s stock price at all (Mathur & Mathur, 2000). Moreover, internal attempts to prevent pollution or increase end-of-pipe efficiencies even lead to a decrease in firm performance (Sarkis & Cordeiro, 2001). This may be explained by the increase in costs of these activities that cannot be easily transferred into premium-prices. However, prior literature also shows that companies with certified environmental management systems (EMS) accomplish significantly higher firm performance compared to firms with less formal systems (Melynk, Sroufe & Catalone, 2003). An explanation for this positive relationship can be found in the resource-based view (RBV) theory (Morgan, Slotegraaf & Vorhies, 2009; Wernerfeldt, 1984). The RBV of a firm suggests that system certifications provide the company with specific knowledge about recycling, waste reduction or pollution prevention (Melynk et. al, 2003). This information enriches the firm’s capabilities that may be sources of competitive advantage as they are embedded in internal routines and are therefore difficult to copy (Morgan et. al, 2009). Thus, formalized system certification is assumed to increase firm performance. Furthermore, the composition of an individual or a group on the corporate level that initiates and controls the implementation of environmental programs represents another aspect of ‘greening the organization’ (Cronin et al., 2010). A group that drives environmental programs should also control, whether these are implemented companywide and across all phases of the business. In doing so, the efforts of these groups are most effective, when they are positioned on the corporate management level of a firm as they otherwise may lack authority (Carter & Jennings, 2004). Applying the RBV argument, this group may also contribute to the knowledge transfer within different organizational functions and thus create enriched internal resources. That eventually creates a competitive advantage and is appreciated by shareholders and investors. Thus, it can be assumed that companies that support initiatives about the greening of the organization increase their firm performance.
22
be equally high as both strategies focus on organizational learning and the enrichment of internal capacities. A more detailed discussion about green alliances is following in the respective subsequent section.
H3: Announcements related to greening the organization will lead to increased stock prices. The effect will be less strong than for green innovations, but equally high as for green alliances.
23
purchase attempts. In particular, when a green alliance is communicated the awareness about a firm’s environmental activities is increasing among stakeholders (Bonini & Oppenheim, 2008), which in the end enriches corporate reputation. Moreover, green alliance members enlarge their knowledge while they share experiences regarding e.g. recycling or environmentally friendly manufacturing (Mellat-Parast & Digman, 2008). Alliance members gain more information than they would without the partnership and thus profit from a higher level of organizational learning, which is the basis of successful product innovation (Jones, 2007, p. 170). Therefore, one can assume that investors appreciate the announcement of a green alliance as they expect that increased learning leads to more successful product launches in the future. The effect of announcing green alliances is moreover assumed to be lower than for announcing green product innovations based the previously mentioned reasons about the differences in visibility and cost transformation. With respect to greening the organization, the strength of the effect is assumed to be equally high as both strategies focus on organizational learning and the enrichment of internal capacities and resources.
H4: The announcement of green alliances will result in positive stock price reactions. The strength of the effect is equal to the announcement of greening the organization and lower compared to green product innovations.
24
superior sales turnovers and market shares (Varadarajan, DeFanti & Busch, 2006). From a consumer behavior perspective, green marketing may contribute to the establishment of such a superior brand image (Hartman & Apaolaza-Ibáñez, 2009), product preference and purchase behavior (Shrum et al., 1995). However, the effect of green marketing on consumer behavior depends on the level of corporate reputation because the stronger the brand, and thus corporate reputation, consumers perceive less risk of whether the product will perform as expected (Picket-Baker & Ozaki, 2008, Chen, 2009). Furthermore, green marketing might be less costly for firms with a higher than for firms with a lower level of reputation because corporate reputation is related to improved labor productivity and labor efficiency (Stuebs & Sun, 2010). However, it is important to keep in mind that there might be a halo linkage from a firm’s financial performance to corporate reputation and green marketing (Orlitzky, 2003). That is, firms that perform well financially, receive higher reputation ratings, despite their true underlying reputation. Moreover, such firms are also more qualified in how to successfully differentiate from competitors and have more resources to spend on green marketing strategies. This means, that firms with a high reputation are likely to develop consistent and credible green marketing strategies that have a high potential to increase firm value. Thus, the better a company’s reputation; the higher may be the chances of e.g. early product adoption and eventually firm performance. Contrary, firms with a bad reputation may suffer from a lack in credibility and stakeholders would simply not trust in the information that such firms publish.
25
4
Research Methodology
In the following chapter, the research methodology used to test the abovementioned hypotheses will be discussed. First, the procedure of an event study methodology will be explained including the model formulation for a multi-country event study setting. In the following section, the statistical tests are discussed which are the Patell t-test and linear regression analysis. Subsequently, the development of the sample and the process of data collection will be described before this chapter ends with a detailed explanation of the operationalization of measurement for the further research.
4.1 Event Study Methodology
26
example of Mathur & Mathur (2000), event study methodology is used in this study to measure the abnormal stock-price reaction on green marketing announcements.
One can assume that investors anticipate the new information already a couple of days before the actual date of announcement due to (intentional) information leakage for example. Investors may also need some days to evaluate the new information. Both cases lead to a situation where the stock price reaction to the announcement does not take place on the actual event day. Therefore, previous event studies use a time frame of several days surrounding the event day (Park, 2004; Geyskens & Gielens, 2002; Mathur & Mathur, 2000). According to the procedure of Mathur & Mathur (2000), a time frame of 20 days is used here, starting ten days prior to and ending 10 days after the announcement was published. This study compares the stock return Riit of each of those 20 days with E(Riit ), which is, the stock return that could be expected when the event had not taken place. To estimate the stock return in a multi-country setting, researchers typically use the world market model that uses ordinary least square (OLS) regression estimates (Park, 2004; Mathur & Mathur, 2000). This is based on the market model for single-country settings but accounts for domestic and global market movements as well as for changes in foreign currency exchange rates. However, previous research regarding the event study methodology revealed that market-model methods also work without a conversion into a common currency (Campbell, Cowan & Salotti, 2009). Therefore, the normal returns are modeled according to the adjusted procedure of Park (2004) as follows:
Rijt = αi + βiRmjt + γiRwmt + εijt (1)
27
returns (ARijt) of firm i in country j on day t are calculated with the parameter estimates from the OLS regression as follows:
ARijt = Rijt – (ai - biRmjt + giRwmt) (2)
where ai , bi and gi are a firm’s specific parameter estimates of αi , βi and γi respectively from the market model of equation (1). This abnormal return is the unexpected change in stock price which is caused by the event that took place.
4.2 Tests of Significance
For this study, two tests of significance are applied. First, one of the most widely used parametric methods is employed to measure the average effect of green marketing announcements on stock price: the Patell (1976) t-statistic. Based on the results, one can draw conclusions about the time horizon in which the overall effect of green marketing is most significant as well as the size of the overall and sub-sample effects. In order to do so, the average abnormal return AARt for day t is computed by summing up ARijt over all N firms of the sample and divided by the number of cases. Then, the Patell-statistic tests whether the average abnormal return is different from 0 using the following formula:
(3)
28
event day, the higher the likelihood that confounding events and other information distort the effect. Following this reasoning, the significant window being closest to the event day will be chosen.
Next to the average effect of green marketing on stock price, this study also aims to investigate the role of potential moderators. Therefore, the cross-sectional variation in the stock price reactions is elaborated further in more detail. In order to do so, the cumulative abnormal return of firm i (CARi) has to be calculated as the sum of the abnormal return of the days of the chosen window. To make conclusions about the impact of the different covariates, the CARs of the most significant and closest event window are regressed against the variables type of green marketing strategy, corporate reputation and the control variables. This procedure also allows comparing the sizes of the effect of green product innovations, green alliances and greening the organization.
4.3 Sample and Data Collection
29
Inclusion Search Terms
Carbon (3) Global Warming (1)
Cause-related Marketing (5) Green (4)
Climate Change (1) Green Product (10)
Conservation (3) Green Promotion (1)
Corporate Social Responsibility (13) Green Supply Chain (3)
CSR (0) NGO (0)
Durable (0) Organic (2)
Ecological (2) Protectionism (0)
Ecology (1) People, Planet, Profit (3)
Emission (12) Recycling (3)
Environment (5) Renewable (1)
Environmental (0) Sustainability (11)
EPA (3) Sustainable (6)
Fair Trade (7) Triple-bottom line (0)
Exclusion Terms
Sustainable Competitive Advantage Socialist
Socialism
Table 3: Overview of search terms and the amount of resulting announcements
30
4.4 Operationalization of Measurement
Firm performance
The daily stock prices of the firms in the final sample are obtained from the Datastream database. This data is used to compute a company’s daily returns (Rit), the market returns (Rmt) and the world market returns (Rwmt).
Corporate reputation
In cooperation with the Hay Group, the Fortune magazine evaluates the reputation of approximately 1.400 companies worldwide via surveys among international top management each year. The top 50 most admired companies are published each year in ranked order in the Fortune magazine and the complete list of all firms is available online. In order to determine the corporate reputation of the sample firms, the overall score of each firm is used. This is measured on a metric scale from 0 to 10, where a high value indicates high admiration. In this study, corporate reputation is operationalized in two ways. First, dummy coding is used to differentiate between companies that are on the Fortune list of the world’s most admired companies and those that are not. For further estimation, it is assumed that listed companies enjoy a higher reputation than not listed ones. Secondly, the original metric scale of Fortune is used for robustness.
Control variables
31
statistically not significant (Hair, Black, Babin, Anderson & Tatham, 2006; Malhotra, 2010). Therefore, one overall firm size factor cannot be generated and the further analysis comprises both firm size measures separately. Both measures are log-transformed, as they are not normally distributed.
32
5
Results
The following chapter represents and illustrates the results that have been gathered through the above-mentioned methods. In section 5.1, the results regarding the main effect of green marketing strategy on stock-price reaction will be presented. In the following section, 5.2, the results related to the moderating effects of type of green marketing strategy and corporate reputation will be described. In order to make conclusions about these specific effects, the entire sample has been sub-sampled by first, the type of green marketing strategy and second, the level of corporate reputation. The differences within these groups have been tested via the Patell t-statistic. This section also contains a detailed description of the outcomes from the linear regression analysis that has been used here in order to explain the impact of all covariates on the amount of cumulative abnormal returns per firm.
5.1 The Main Effect of Green Marketing
For each firm i, the parameters (αi,βi andγi)of the world market model in equation (1) were estimated by using an estimation period of 100 days (t = -110 to t = -10 relative to the event day, t = 0). These estimated parameters are then used to compute the abnormal returns (ARijt) for all 100 cases of the sample and the average abnormal returns (AARt). Table 4 represents the values for the average abnormal returns, the respective values of the Patell t-statistic and the percentage of positive AARs on the event day, as well as for the window of ±10 days surrounding the event day. Figure 2 illustrates the average abnormal returns for the same time period.
33
methodology (McWilliams & Siegel, 1997). For that reason, McWilliams & Siegel (1997) suggest using the event window which is closest to the event day in order to make conclusions about hypotheses over the one that shows the largest CAAR. Therefore, this short-term window from day -1 to the event day is chosen to form the basis of making conclusions about the main effect of green marketing on stock price (H1). With a p-value smaller than 0.001, there is enough evidence to confirm H1. Green marketing has an overall positive effect on stock prices from one day prior to the event to the event day itself.
Event Day Average Abnormal Return (%) Patell t-statistic Percentage of Positive Abnormal Returnsa -10 .146 .468 53 -9 -.050 -.502 47 -8 .013 .128 51 -7 .028 .277 46 -6 -.021 -.208 53 -5 -.068 -683 52 -4 .223 ** 2.242 55 -3 -.059 -.593 43 -2 -.026 -.267 57 -1 .257 *** 2.582 58 0 .166 * 1.672 59 +1 -.030 -.305 53 +2 .033 .332 57 +3 -.070 -.707 41 +4 -.170 * -1.706 38 +5 -.043 -.435 42 +6 .132 1.328 38 +7 -.028 -.285 44 +8 -.055 -.554 48 +9 -.129 -1.297 37 +10 -.080 -.803 43 a
These values represent the percentage of the 102 abnormal returns that are positive for each day. For instance, 59% of all cases have a positive abnormal return on the event day.
Italic, bold lines symbolize the shortest and most significant event window from t = -1 to t = 0 *** p < .001
** p < .05 * p < .10
34 Figure 2: Average abnormal returns for green marketing
Next to the statistical significance, the economic importance has to be considered as well. For that reason, the average change in market value of a medium-sized company in this sample is computed1. A cumulative abnormal return of .43 % for a firm with a market value of $16.07 million results in a boost in market value of $69,101 in two days. However, regardless of this immediate increase in market value, the question remains whether this positive assessment is simply a short-term reaction that is quickly adjusted for. Table 4 and Figure 2 show, that four days after the event has taken place, there is a significant drop in AAR of -.17 %, which implies a partial correction of the effect of .43 %. Hence, it can be concluded that in the following days, the positive effect of green marketing is slightly compensated for although the positive evaluation still outweighs the negative ones in the long-run.
5.2 Moderating Effect of Type of Green Marketing and Corporate Reputation
The announcement of green marketing strategies is, on average, evaluated positively by investors. Nonetheless, negative abnormal stock returns are found in more than 40 % of all cases (Table 4). The final aim of this research is to explain the variation in stock-price reactions by the two moderators type of green marketing and corporate reputation. According to the procedure of Mathur & Mathur (2000), the 100 announcements are
1
This average firm is identified by the median in total assets. The median is preferred over the mean to avoid the impact of outliers. This leads to Thermo Fisher Scientific as the average firm in this sample. Furthermore, the market value of Thermo Fisher Scientific is measured as the mean number of common shares outstanding (42,092.5) multiplied with the average share price ($38.17) over a period of 100 days prior to the event, starting at t = -110 to t = -10 (McWilliams & Siegel, 1997).
35
therefore sub-sampled into the three categories green product, greening the organization and green alliance. Table 5 represents the AARs for each group from the event day and ±10 around it and Figure 3 illustrates these values for the same time horizon. A line representing a 10 % significance cannot be included in this case as the degrees of freedom are different for each group.
Announcements regarding green product innovations have the anticipated positive effect. For the event window (from t = -1 to t = 0), the CAAR has a value of .310 % (p < .10). This means that the stock-price abnormally increases with more than .3 % within those two days. The announcement of greening the organization leads to a CAAR of .370 % in the event window (p < .10). Thus, announcing greening the organization leads to an abnormal boost in stock-price by almost .4 %. Green alliance announcements lead to an increase in stock-price by .502 % within the event window (p < .01). Hence, based on the Patell t-test, one can conclude that all types of green marketing strategy boost the stock-price abnormally. Whether there is a difference in the effect has to be examined further with linear regression analysis in a following section.
Event Day Green Product AAR (%) Green Organization AAR (%) Green Alliance AAR (%)
-10 .281* .367* -.144 -9 .101 -.125 -.102 -8 -.035 .165 -.047 -7 .061 -.111 .138 -6 -.251 .182 .102 -5 -.069 -.307 .167 -4 .343** .058 .217 -3 -.063 -.167 -.042 -2 -.179 .051 .080 -1 .017 .373* .454** 0 .294* -.003 .048 +1 .234 -.019 -.426** +2 -.002 -.170 .255 +3 -.084 -.012 -.062 +4 -.260 .164 -.358** +5 -.120 .400* -.245 +6 .334** -.200 .140 +7 .005 -.004 -.247 +8 .050 .278 -.413** +9 -.169 -.087 -.032 +10 .218 -.144 -.345* Italic, bold lines symbolize the significant overall event window from t = -1 to t = 0
** p < .05 * p < .10
36 Figure 3: AARs for sub-sampling by the type of green marketing strategy
In order to analyze the moderating impact of corporate reputation, the entire sample is divided into two categories: firms with high reputation (reported on Fortune list) and firms with low reputation (not reported on Fortune list). Table 6 and Figure 4 represent the AARs for the event day and ±10 days surrounding the event day. The results show that for the event window from t = -1 to t = 0, firms with a high level of corporate reputation have a highly significant, abnormal boost in stock-prices by .421 % (p < .01). For firms with a lower level of corporate reputation, there is an abnormal increase in stock-prices by .252 % on a 10% significance level (p < .10). As H5 stated, there is assumed that the effect for firms with a high reputation is significantly larger than the effect of firms with low reputation. Whether this holds for this study has to be assessed with linear regression analysis.
-0,8 -0,4 0 0,4 0,8 -10 -8 -6 -4 -2 event +2 +4 +6 +8 +10
Green Organization Green Alliance Green Product
AAR in %
37
Event Day High reputation AAR (%) Low reputation AAR (%) Entire Sample AAR (%)
-10 .091 .147 .146 -9 .175 -.255* -.050 -8 -.000 .026 .013 -7 .053 .001 .028 -6 -.024 -.009 -.021 -5 -.005 -.078 -.068 -4 .046 .321** .223** -3 -.007 -.095 -.059 -2 .096 -.145 -.027 -1 .362*** .052 .257*** 0 .059 .200 .166* +1 -.155 .086 -.030 +2 .184 -.121 .033 +3 -.049 -.066 -.070 +4 -.254* -.030 -.170* +5 -.156 .086 -.043 +6 .188 .015 .132 +7 -.079 -.025 -.028 +8 -.045 -.046 -.055 +9 -.010 -.194 -.129 +10 -.156 .032 -.080 Italic, bold lines symbolize the significant overall event window from t = -1 to t = 0
*** p < .001 ** p < .05 * p < .10
Table 6: AARs for sub-sampling by corporate reputation
Figure 4: AARs for sub-sampling by corporate reputation
In order to gain deeper insights in the nature of the effects, the cumulative abnormal returns (CAR) from day t = -1 to day t = 0 of the entire sample have to be regressed against all covariates, according to the common procedure of an event study (Park, 2004; Mathur & Mathur, 2000; Geyskens and Gielens, 2002). The results are represented in Table 7.
-0,4 -0,2 0 0,2 0,4 0,6 -10 -8 -6 -4 -2 event +2 +4 +6 +8 +10
High Reputation Low Reputation AAR in %
t
38
* p < . 05
Dependent variable: CAR (-1), (0)
Table 7: Moderator and control variable analysis for entire sample
The outcomes show that there is no significant difference in the effect of green product innovations, greening the organization and green alliances (respective p-values > .05). Therefore, H2, H3 and H4 can only be partly supported. Moreover, the effect of high corporate reputation is positive (b = .522) but not significant (p > .05). Hence, H5 cannot be supported. Apparently, there is not enough statistical evidence to say that corporate reputation moderates the relationship between green marketing and financial firm performance. Firms with a high level of corporate reputation do not achieve a larger return on green marketing investments than firms with a lower level of corporate reputation. Furthermore, the success level of green marketing is affected by a firm’s country of origin. The effect of green marketing is stronger for companies that are originally from Europe (b = 1.002, p < .05). Finally, the relationship of green marketing and stock-price reactions is not affected by firm size, the date of announcement and industry (all respective p-values > .05).
The robustness of this finding is evaluated on two ways. First, an interval scaling method of corporate reputation is used. However, the regression analysis does not reveal different results. The detailed overview of the regression results of the first robustness check is represented in Appendix B. For the second robustness check another measure for firm size is used: number of employees. Nonetheless, replacing total assets by the number of employees does not reveal different results (see Appendix C).
Hypothesized Sign b t-value
Intercept 7.862 .322
Type of Green Marketing
Green Organization + -.089 -.229 Green Alliance + .107 .296 Corporate Reputation Control Variables + .522 1.329 Event Date -.000 -.319 Asia .177 .429 Europe 1.002 2.249*
39
40
6
Discussion
In the following chapter, the previously presented outcomes of this research will be discussed and conclusions will be drawn. Therefore, the most relevant results will be summarized and compared with the outcomes of previous studies in section 6.1. Subsequently, these findings will be related to practical issues and five core implications for marketers and managers will be developed. This chapter ends with an assessment of research limitations and gives recommendations for future studies.
6.1. Summary and Discussion of Findings
41
long-run, as a number of significant, but negative stock-price reactions can be detected after the announcement has been published. The CAAR of the time frame of five days, starting one day after the event (p < .01) has a value of -.591 %, which means that firms announcing green alliances observe a net decrease in market value by almost .14 %. This implies that that the immediate positive effect is quickly corrected and that announcing green alliances is from a long-term perspective even negative. Obviously, there is a difference in time when the strategy types are assessed by investors. Unfortunately, event study methodology does not cover this difference in timing when the same event window has to be applied for all sub-samples as it is defined by e.g. Park (2000). It might be interesting to consider the effects of each strategy type individually and assess the main effect of green product innovations, greening the organization and green alliances separately. Corporate reputation was considered as the second moderator that has an impact on the relationship between green marketing and firm performance. However, the hypothesis of significantly positive stock-price reactions for firms with a higher reputation could not be supported. Corporate reputation is not a significant determinant of the success of specific types of green marketing strategy. Specifically, firms with a higher reputation cannot make an advantage out of their high publicity and corporate awareness, when they announce green marketing strategies. But that also means that firms with low reputation do not suffer from a lack of credibility when they are publishing information about their green product innovations for example. Next to two measures of firm size (total assets and number of employees), industry, country of origin and the date of the announcement were used in the analysis, too. The results show that industry and the date of announcement have no impact on the success of green marketing strategies (all respective p-values > .10). However, country of origin has a significant effect for one situation: Companies from Europe observe a significantly larger abnormal return on green marketing strategies than firms from North America or Asia.
42
overall negative effect of green marketing, while the results of this study reveal that green marketing boosts firm value by more than .4 % on average. Furthermore, green product innovations and initiatives related to greening the organization had no significant effect for Mathur & Mathur (2000), whereas this study could confirm a positive effect for those types. Green alliances, greening the organization and green product innovations lead to positive abnormal returns in this study. Nonetheless, a question that remains is whether the increase in abnormal returns is actually based on the green feature of product innovations or if just the product launch itself generates this boost regardless the environmental component. To find an answer to this question, one can compare cases that announce green product innovations with cases that announce the launch of ‘usual’ products. One may argue that the launch of green products generates more additional market value than the launch of non-green products. This may enable the researcher to make conclusions about the additional value that is generated by the green characteristic of a new product. Unfortunately, we only collected corporate statements that specifically announce a green marketing strategy which means that the sample does not include any cases of non-green product innovations. However, the results of this research might be compared with event studies that investigated the short-term impact of ‘usual’ product launches (Sood & Tellis, 2009; Jones & Danbolt, 2005; Sorescu, Shankar & Kushwaha, 2007). The results range from no significant abnormal returns (Sorescu et al., 2007) to positive abnormal returns of .5 % (Sood & Tellis, 2009) and 1.7 % (Jones & Danbolt, 2005). It seems like the stock-price returns on green product innovations are not higher that the returns on ‘usual’ product innovations. However, this implication is based on a comparison of this study with three others that were all conducted under different circumstances. Thus, one cannot conclude whether the green feature leads to more additional firm value than ‘usual’ products for now.
43
taking the main effect within the event window into account. However, considering that the first positive reaction on green alliances is soon corrected for, one may imply that green alliances perform worse than strategic alliances.
A comparison of the findings of this study with recent CSR event studies indicates that green marketing may have a higher potential to increase market value than CSR initiatives. Arya & Zhang (2009) found that CSR announcements in general do not result in abnormal stock return, based on a sample of firms operating in South Africa. A negative effect of CSR announcements on firm performance could be identified by Doh, Howton, Howton & Siegel (2010) for firms that were deleted from the Calvert Social Index. For firms that were added to this index, the effect of CSR announcements was insignificant. Contrary, the results of Wang, Qiu & Kong (2011) indicate an increase of .24% in abnormal return for Chinese firms after they have announced CSR initiatives. The results of this study show that, on average, green marketing strategies lead to a boost in market value by .43% while the results of CSR studies indicate no or only slightly positive stock-price reaction. One could argue that CSR may be rather perceived as a philanthropic attempt whereas green marketing also has a strategic character. Thus, one might say that pursuing a green marketing strategy is more suitable to combine profit orientation with environmental responsibility.
6.2. Implications for Managers and Marketers
Although the main effect of green marketing is of a positive nature, managers cannot take for granted that investors will always react optimistically as more than 40 % of the cases result in negative stock returns within the event window. Consequently, it is essential for marketers and corporate managers to know what drivers influence the success of a green marketing strategy. Table 8 summarizes the most important findings from this study from a marketer’s perspective:
Green Marketing Strategy Effect on Abnormal Returns
Green Organization +
Green Alliance +
Green Product Innovation +
44
The following six core implications emerge for marketers and corporate managers:
1. Greening the organization boosts market value: Firms can significantly gain from investing in waste reduction or system certification. When announcing such initiatives, firms denote a significant increase in stock returns. This means that such a strategy symbolizes a way to increase a firm’s market value and it may eventually increase the firm’s reputation in the long-run.
2. Green alliances might increase firm value for the short-term: Building an alliance with aid organizations is a reasonable tool for firms to demonstrate responsibility and to give something back to the environment where they operate in. Specifically, companies can boost their firm value by .5 % for the short-term. However, it is not clear whether this effect is stable over time and managers should take other empirical results about green alliances into account when they have to decide for or against the implementation of green alliances.
3. Green products are likely to succeed: Announcements of green product innovations result in significantly positive stock returns that eventually lead to an increase of market value by more than .4 %. Apparently, investors positively assess green product innovations and believe that the associated costs outperform the market potential. 4. High corporate reputation is no driver of green marketing success: Firms with a less
established or even a bad reputation do not need to hesitate implementing green marketing. Firms of any level of corporate reputation can achieve positive stock returns from green marketing strategies.
5. European firms gain most from green marketing: European firms have an advantage over US-based, Canadian and Asian firms when pursuing green marketing strategies. The overall positive effect of green marketing that leads to increased market value is even larger for firms that are originally based in Europe.
45
6.3. Research Limitations and Future Research Opportunities
46
7
Conclusion
Companies are more and more challenged to act environmentally friendly. But implementing strategies that lead to waste reduction, energy efficiency and green product innovations are costly and marketers and corporate managers may wonder whether such strategies serve the needs of customers and shareholders simultaneously. Managers need to know if green marketing strategies contribute to firm value and under what particular circumstances. The findings of this research show that green marketing can indeed be a valuable asset for both, firms with high and firms with low corporate reputation as investors generally appreciate green marketing strategies in the short-run. This gives important implications for marketers and managers: Investing in green product innovations, greening the organization and green alliances most likely leads to immediately boost in firm value. However, companies should carefully take long-term investigations into account as well when they have to decide for or against the implementation of green marketing strategies. Managers as well as marketers should estimate beforehand, whether the success level of green marketing will be stable over time. This further symbolizes diverse opportunities for forthcoming studies. Future research should for instance compare the positive short-term reaction with the long-term assessment of green marketing strategies. Only this can form a substantial basis for managers and marketers to make estimate the additional value of implementing green marketing.
