Edinburgh Napier University

  While the rate of climate change appears to have risen substantially in recent years, relatively little is known regarding ‘how’ firms alter the relationship between corporate environmental performance (CEP) and corporate financial performance (CFP). Recent research into the relationship between CEP and CFP proposes a variety of contextual and firm factors which can create a more robust link. However, few of these studies explore the role of environmental research and development (R&D) investment. Using micro-level data, this paper investigates how environmental R&D affects the CEP–CFP relationship from the perspective of global climate change and an international environmental agreement. We develop a fixed effect model for estimation, analyzing a panel dataset of 362 firms from 2003 to 2010. We find that carbon emissions persistently decrease firm value. We also find that the market ‘penalizes’ firms׳ negative environmental performance more consistently than its positive performance. Further analysis indicates that corporate efforts to comply with international environmental agreements such as the Kyoto Protocol are not a binding constraint on firm performance.