The Green Tobin’s q: Theory and Evidence
Abstract: This paper derives from a dynamic stochastic model a green Tobin’s q as a function of
pollution abatement efforts, stockholder proposals for green effort, R&D expenditures, stock of
knowledge [given by patents in green technologies], firm’s capital stock and investments.
Regression results using data from the oil industry show that most of the models indicate a negative
impact on Tobin’s q from green patents and R&D, and a positive one from shareholder proposals.1
Keywords: Pollution, R&D green technologies, firm objectives
JEL Classification Numbers: Q55, L29, G32
1 We would like to thank, without implicating, Doug Cumming, Ky Yuhn and Hasan Bhuyan for their comments.
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1. Introduction
Ever since Friedman (1970) made the “social responsibility of business” well-known (to
increase profits), academics have searched for the value-relevance of various corporate social
components. Over twenty years ago, Griffin and Mahone (1997) studied twenty-five years of
corporate social performance (CSP) and corporate financial performance (CFP) only to deduce:
“the a priori use of measures may actually predetermine the CSP/CFP relationship outcome.” (p.
5) In the interim, the value of environmental performance, in particular, has gathered considerable
interest, but often viewed only through the broader lens of corporate social responsibility (CSR),
socially responsible investing (SRI), environmental, social and governance (ESG) or the general
notion of “doing well and doing good.” (Bhandari & Javakhadze, 2017; Dutordoir, Strong, & Sun,
2018; Griffin, Neururer, & Sun, 2018; Hamilton, Jo, & Statman, 1993; Renneboog, Ter Horst, &
Zhang, 2008b; Renneboog, Ter Horst, & Zhang, 2011). In their meta-analysis of 251 studies,
Margolis, Elfenbien, and Walsh (2009) find a small but positive relationship between social and
financial performance that is getting smaller over time.
Similarly, the intersection between financial and environmental performance has gained
more interest in energy economics, delivering similarly mixed evidence (Nordhaus, 2002; King
and Lenox, 2002; Buonnano et al., 2003; Elsayed and Paton, 2006; Newell, 2007; Popp, 2006;
Konar and Cohen, 2001). As (Buchanan, Cao, & Chen, 2018) note, “existing theoretical research
remains inconclusive on the effect of CSR on firm value or financial performance.” (p. 1) To our
knowledge, only one paper (Fatemi, Fooladi, & Tehranian, 2015) provides theory for what to
expect of CSR. We add to the literature by extending well-documented q-theory to include green
considerations that heretofore have largely been empirical and ad hoc. We focus on the
environmental component of firm social considerations in the Green Tobin’s q to fill this gap in
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the literature and offer some evidence from the oil industry to test the model herein derived.
Similar to the empirical literature, we find both positive and negative relationships of
environmental and financial performance.
Recently, there has been increasing political and public pressure on companies to improve
their green record (Cahan, Chen, Chen, & Nguyen, 2015). Some studies find this pressure to be
value destructive for political inclinations (Di Giuli & Kostovetsky, 2014) or entrenchment
considerations (Surroca & Tribó, 2008), while other research has found that the pressure for better
CSR commands higher acquisition premiums (Deng, Kang, & Low, 2013), provides a strategic
choice (Wu & Shen, 2013) and generates positive abnormal return for environmental and social
engagement (Dimson, Karakaş, & Li, 2015). Firms’ stockholders have also been influenced by
public opinion and are putting additional pressure on corporations to improve their environmental
performance (Flammer, 2015). It is in the best interests of large corporations to help preserve the
environment, has become a mantra. If their activities hurt the environment, through pollution for
instance, they are supposed to invest in new technologies to abate pollution and avoid market
retribution.
This paper investigates the nexus between financial performance (Tobin’s q) and
environmental efforts: green technology, an internal measure at the forefront of firm activities, and
green shareholder pressure, an external measure expressing concern over current firm practices.
If green efforts increase profits, firms have incentives to reduce their environmental damages.
Since corporations invest in R&D for the development of green technologies and shareholders
pressure firms to address environmental concerns, these investments must surface in Tobin’s q at
some point. The objective of this paper is to theorize under what conditions Tobin’s q becomes a
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function of green efforts and to test this theory with data from the oil industry for an assessment
of the size and signal of the impact on q.
The focus on oil companies is justified, since they are deemed as one of the main culprits
of pollution, kept in the public eye by the ubiquitous presence of gas stations, possibly at the
epicenter of the debate on climate change. Reputational capital is important to these highly visible
firms (Cahan et al., 2015; Jha & Cox, 2015). Intense analyst scrutiny (Adhikari, 2016; Griffin et
al., 2018) of some of the largest publicly traded companies places additional pressure on oil
companies to mitigate risk exposure, environmental or otherwise. For these reasons, the green
policies of oil firms make them prime candidates to examine. As pondered in a recent article by
The Economist, “for all the cynicism that oil firms are ‘greenwashing’ their way through the energy
transition, [their] efforts should be taken seriously. But how seriously?” (Ryder, 2019, p.1). This
paper provides theory to answer that question.
Rather than rely on CSR, ESG or SRI indexes, we employ two hand-collected samples for
our measures of green effort. For green technology effort, we search Google Patents for any
patents filed by the major oil firms which mention “carbon emissions” and corroborate this search
with patent data from Patstat. For green pressures, we review all shareholder proposals to these
firms which mention “climate change.” The Green Tobin’s q model focuses on how these green
efforts,2 along with traditional components, are a function of q. We find that green technology
effort is negatively correlated with q, and green pressure is positively correlated with q. These
correlations hold for most of the models we use to test our model: established control variables,
along with time and firm invariant factors, followed by causation exercises. The granularity of the
data exposes the strength of each component’s influence on q.
2 In the appendix, we also consider abatement costs in Error! Reference source not found..
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The rest of the following paper is organized as follows: The next section reviews the
literature. Section 3 derives a stochastic model to determine the Green Tobin’s q. Section 4
presents evidence of green effort for all major firms in the petroleum industry. We test the model
in Section 5 with data from the oil industry and various statistical methods from the literature.
Section 6 finds robustness. Concluding remarks appear in Section 7.
2. Literature Review
Essentially, q-theory of investment says that a q greater than unity stimulates investment,
i.e., when capital is valued more highly in the market than it costs to produce it, investment flows
to this opportunity for growth (Brainard & Tobin, 1968). Therefore, any examination of Tobin’s
q, green or otherwise, compares market value to replacement costs, a comparison of accounting
data to financial valuation, as stressed by Lindenberg and Ross (1981). Tobin’s q is the ratio of the
market valuation of real capital assets to the current replacement cost of those assets (Tobin &
Brainard, 1977). As certain as the balance sheet equates assets to claims against them, Tobin’s q
considers the market’s opinion of all assets in ratio form to their booked costs.
2.1. Green Technologies
It is well-known that there are two market failures associated with new green technologies:
environmental externalities and the public goods nature of new knowledge. As a consequence,
there is underinvestment in R&D greener technologies. To address this shortcoming, government
subsidies to greener R&D projects are often proposed as part of a policy solution (e.g., Newell,
2007). Popp (2006) shows that R&D subsidies lead to significant increases in climate-friendly
R&D, however this R&D has little impact on the climate itself. Dechezleprêtre et al (2013)
examine the economic consequences of government support for development of clean technologies
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and find they generate up to 40% higher levels of spillovers into unrelated industries. These authors
also investigate the impact of knowledge spillovers on firms’ market value, using firm-level
financial data to find that the marginal economic value of spillovers from clean technologies is
also greater. As is well-established in the innovation literature (Nelson, 1959), those that invent
do not always reap the benefits, thus a distinction between socially desirable and privately
profitable (Aghion & Howitt, 1990), almost an inherent consequence of incomplete contracts
(Grossman & Hart, 1986). Consequently, a negative association of green effort and market value
may merely reflect political will to subsidize what the market judges to be more socially desirable
than privately profitable. Over time, however, all firm investments and expenditures are expected
to produce profits. At some point, the market renders a verdict: the green effort either find market
support as an investment or proves to be a social subsidy.
Another important related issue analyzed by the literature is whether environmental R&D
crowds out other R&D investments. Nordhaus (2002) shows that new energy R&D completely
crowds out other R&D; his result is due to the assumption of a fixed supply of R&D labor. If
energy R&D is a complement of other R&D, crowding out does not occur (Buonnano et al., 2003).
Popp and Newell (2014) find no evidence at the industry level of crowding out across sectors but
do discover that increases in alternative energy patents leads to fewer patents of other types. This
begs fundamental questions that Hicks (1932) hypothesized of factors of production when they
become relatively more expensive; “induced innovation” explains governmental efforts to affect
input prices. On the margin, do green technologies crowd out at the expense of technologies? Are
green technologies winning a competition assisted by the government? No matter how vast a
firm’s internal markets, tournaments for resources within the firm keeps the competition lively.
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Whether or not the prize is charity, investment or signal (Lys, Naughton, & Wang, 2015), the
Green Tobin’s q provides a theoretical roadmap for empirical application.
The empirical literature on the relationships between environmental and financial
performance finds ambiguous results, much like the empirical ambiguity of value created by CSR
(Margolis, Elfenbien, and Walsh, 2009). Elsayed and Paton (2006) show in a static and dynamic
panel data analysis that environmental performance has a neutral impact on financial
performance. Some studies (e.g., Cordeiro and Sarkis, 1997, Sarkis and Cordeiro, 2001, Wagner
et al., 2002, Rassier and Earnhart, 2010) find a negative relationship. Other articles (e.g., Konar
and Cohen, 2001, King and Lenox, 2002) report a positive relationship. For instance, Konar and
Cohen (2001) indicate that a decrease in toxic chemical emissions ameliorates Tobin’s q − 1 (or
the intangible portion of q) in the S&P 500 firms. King and Lenox (2002) find evidence that waste
prevention is underused, and that firms can improve their financial performance by engaging in
more waste prevention. Ambec and Lanoie (2008) suggest that better environmental performance
can improve financial performance in both cost reduction (e.g. risk management and relations with
external stakeholders; costs of material, energy, and service; cost of capital; and cost of labor) and
revenue creation (e.g. better access to certain markets, differentiating products and selling
pollution-control technologies). Chava (2014) finds material reductions in a firm’s cost of capital
when screened according to their environmental profile. A slight edge for a positive relationship
between environmental and financial performance appears to favor more recent studies.
The measures and samples of financial and environmental performance are many and
varied. Iwata and Okada (2011) study the financial performance of Japanese manufacturing firms
responding to different environmental issues. The authors employ various indices -- such as ROE,
ROA, return on investment (ROI), return on invested capital (ROIC), ROS, Tobin’s q − 1, and the
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natural logarithm of Tobin’s q -- in order to take into account each market's evaluation of corporate
effort to deal with different environmental issues. Waste emissions do not have significant effects
on financial performance, while greenhouse gas reduction leads to an increase in financial
performance but for clean industries only. Nakao et al. (2007) also studies Japanese firms to show
that a firm's environmental performance has a positive impact on its financial performance and
vice versa. Lioui and Sharma (2012) construct a study to expose direct versus indirect impacts of
ECSR (environmental corporate social responsibility.) The authors discover that the direct impact
of on ROA and Tobin’s q is negative, while the interaction of ECSR and R&D has a positive and
significant impact on q. ECSR strengths and concerns harm financial performance since they are
perceived as a potential cost, but additional R&D effort to address these costs is rewarded. In
allowing for indirect impacts while decomposing the ECSR index, Lioui and Sharma (2012) find
strong support for their main finding: firm value benefits from R&D effort spurred by ECSR. The
proxies employed, sample construction and decomposition influence the sign, size and strength of
the relationship between environment and financial performance.
Timeframe and length, of course, also exert an influence. When environmental regulation
is considered, Delmas et al. (2015) find a negative short run impact on accounting returns but
positive long-term value implications for Tobin’s q through improved environmental performance.
These negative short-term but positive long-term implications are also observed by Cordeiro and
Sarkis (1997). Horváthová (2010), through meta-analysis, finds that a more consistent, negative
link between environmental performance and financial performance with simple correlation
coefficients and portfolio studies, than with more sophisticated econometric techniques (multiple
regressions and panel data) which fail to provide consistent evidence. A positive link is found in
her meta-analysis of 37 empirical studies, but these win-wins for environmental performance and
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financial performance are found more frequently in common law countries where investors are
afforded more protection than in civil law countries. Even over extended horizons, a consistent
signal between environmental and financial performance is difficult to find.
Consistency in the oil industry, likewise, has its challenges. Oil and gas firms have been
categorized as “low R&D intensity” because they have historically invested less than 1% of their
net revenue in research and development (von Tunzelmann and Acha, 2006; Moncada-Paternò-
Castello et al., 2010). Apparently, the industry seems to be changing. Technology appears as an
increasingly important strategic priority for several international oil companies (IOCs) (e.g.,
Kulkarni, 2011; Parshall, 2011; Chazan, 2013). Spending on innovation and R&D by oil
companies rose dramatically over the past few years (Thuriaux-Alemán et al., 2010). Many
companies have adopted the concept of “open innovation” (Chesbrough, 2003) and more
collaborative models of R&D embracing ideas from other industries and technical domains (e.g.,
Verloop, 2006; Ramírez et al., 2011).3 Helfat (1994) investigates a hypothesis of the evolutionary
theory of business firm (e.g., Nelson and Winter, 1982), namely, that firms within an industry will
persistently differ in the amount of effort and expenditures devoted to various R&D applications.
He finds evidence supporting the theory testing the hypothesis for the petroleum industry. Perrons
(2014) studies how innovation occurs in the oil and gas industry with two main discoveries: first,
that service companies file more patents per innovation than other types of organization, and that
neither universities nor government research organizations are valuable sources of information and
knowledge in industry’s R&D initiatives. For these reasons, the oil industry is a timely sector of
3 Haas and Popov (2019) show that carbon-intensive industries develop and implement greener technologies; they produce more green patents as the stock markets deepen.
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the economy to examine, even if the industry’s relationship between environmental and financial
performance, itself, is not timeless.
The literature on the financial performance of environmental (green) technologies lacks
theory to clarify when crowding out can be expected, why more recent studies increasingly find
positive correlations between environmental and financial performance and what is prompting
more intense innovation efforts in the oil industry. As explained next, the investing public and
existing investors in these firms have become more vocal in their concerns with the environment.
2.2. Green Stockholder Pressure
Speaking directly to the R&D environmental initiatives at oil companies, the CEO of Royal
Dutch Shell, Ben Van Beurden, emphasized recently, when discussing the “hard truths” about
climate change, the need to gather shareholder approval. The confrontation of climate change,
according to him, “needs shareholders’ support to move in the right direction.” (Ryder, 2019).
Given this insight, shareholder support can be viewed as the green light for oil firms to pursue
green efforts, from the perspective of existing investors. Green q theory sheds light on the market’s
opinion in a world of alternative investments. In reference to the literature, this desire to garner
shareholder support for these risky green efforts relaxes firm tolerance for loss that encourages
innovation (Chen, Leung, & Evans, 2016; Manso, 2011). Thus, if firms are to innovate ways to
abate pollution or create clean technologies, a greater lenience for research that “fails” to develop
is requisite to the creative process. In other words, owners leaning less on agents for immediate
profits and being more tolerant of the failures that accompany R&D is conducive to innovation.
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Several studies examine how shareholders govern the environmental impact of their
investments. Kock, Santaló and Diestre (2012) focus on conflicts between stakeholders and
management, by examining boards, corporate control and regulation as forms of governance to
discover their impact on environmental performance; governance helps resolve conflicts over
environmental responsibility. Flammer (2015) investigates the impact on Tobin’s q several years
after a CSR proposal gathers majority support; she finds a significant positive association four
years hence. Amore and Bennedsen (2016) exploit changes in anti-takeover legislation and
variation in state abatement costs to determine weak governance impeding the efficiency of
environmental innovation. Bhandari and Javakhadze (2017) demonstrate the distortions to
investment sensitivity that CSR has in a traditional q-theory framework, namely, firms with higher
CSR scores have a less sensitive q-investment relationship. Importantly, the authors examine the
environmental component of CSR to discover a heightened investment sensitivity: a distortion that
becomes more pronounced when there is more potential for agency conflicts and greater
stakeholder engagement. Whether investments are being made in firms or by firms, CSR measures
impact investment decisions.
As alluded to above, CSR is an investment like any other investment that competes for firm
resources, a competition that can be swayed by shareholder pressure. The question that occurs on
the margin becomes: Since “the law gives corporate managers considerable implicit and explicit
discretion to sacrifice profits in the public interest” (Elhauge, 2005, p.1), when does the market
render its verdict? Green Tobin’s q helps evaluate this discretion such that a determination can be
made if “CSR is close to theft” (Reinhardt, Stavins and Vietor, 2008, p. 221) or the distance from
Butler and McChesney’s (1999) “bad philanthropy” (p. 1205). Although they do not employ q-
theory and examine environmental performance specifically, Fatemi et al. (2015) derive a model
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for the impact of CSR on firm value and demonstrate through simulations that, in some
circumstances, CSR expenditures do create value. Extending Green Tobin’s q to allow for
shareholder pressure and stakeholder engagement provides theory for empirical assessments.
The literature on shareholder proposals has struggled to identify definitive purpose for this
form of governance, most of which is centered on the United States where proposals make regular
appearances (Manne, 1965; Pound, 1988; Karpoff et al, 1996; Gillan and Starks, 2007; Levit and
Malenko, 2011; Renneboog and Szilagyi; 2011). Even if not definitive purpose, Buchanan, Netter
and Yang (2010) find stronger associations for US proposals than those in the UK to impact
management behavior. Exploiting discontinuities in market reactions around “close call” votes at
annual meetings, Cuñat, Gine and Guadalupe (2012) find positive market responses to increased
governance. Such an approach to discontinuity is also employed by Flammer (2015) who
discovers positive announcement returns for CSR proposals that pass when vote outcome is too
close to call prior to the annual meeting. As supplemental evidence, Flammer (2015) investigates
the impact on Tobin’s q several years after a CSR proposal gathers majority support; she finds a
significant positive association four years hence. With guidance from the literature, the following
model theorizes how shareholders are able to influence their investments when expressing climate
concerns through their proposals.
Even if ad hoc, the literature provides insight on the function of green efforts in Tobin’s q.
Although we conduct several empirical exercises in line with previous literature, we are primarily
concerned with theory to explain how green effort functions in profit-maximizing firms and is
reflected in their q, rather than aligning with one side of the “goodness” debate or reconciling
conflicting evidence in the literature. As we demonstrate next, green efforts affect the probability
of successful innovations and abatement costs to address environmental concerns, reflected in q.
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3. The Model: Green Tobin’s q
The industry has N identical firms, the representative firm’s real profits, neglecting all
costs, are proportional to its capital stock k, and decreasing in the industry-wide capital stock K;
thus they take the form 𝜋(𝐾)𝑘, where 𝜋′(𝐾) < 0.4
The representative firm also invests M in the innovative activity, which is the rate of
expenditure in R&D of cleaner technologies that help abate pollution. Assuming zero depreciation
rate, the firm’s investment I, equals the rate of change of the firm’s capital stock, �̇� and R&D
expenditures M:
𝐼 = �̇� + 𝑀 (1)
The variable V represents the stock of knowledge, which is accumulated as an increasing
function of R&D expenditures:
�̇� = ℎ(𝑀) (2)
There are adjustment costs associated with the rate of change of the firm’s capital stock
and pollution abatement A, 𝑍(�̇�, 𝐴) = 𝑎𝐴𝐶(�̇�), where a is a parameter representing stockholder
pressure for green effort, and C(�̇�) is a convex function of the rate of change of the firm’s capital
stock satisfying, 𝐶(0) = C′(0) = 0, 𝐶′(�̇�) > 0, 𝐶"(�̇�) > 0.
R&D may be fruitless, as it is a risky activity. Therefore, firm’s profits overtime are
impacted by the uncertainty of innovative activity. The representative firm’s intertemporal profits
are given by:
4 See Romer (2006)
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∫ 𝑒−𝑟𝑡{ℵ(𝑉)[𝜋(𝐾)𝑘 − 𝐼 − 𝑎𝐴∞
0𝐶(�̇�)] + 𝑤(𝑉)ℎ(𝑀)ℶ(𝑘, 𝐴)}𝑑𝑡 (3)
Where the term 𝑤(𝑉)is the subjective probability density function that the innovation will occur
at the state of knowledge V, so the probability density that the innovation will occur at time t is
𝑤(𝑉)ℎ(𝑀). ℵ(𝑉) is the probability that the innovation will never occur. The term ℶ(𝑘, 𝐴) denotes
the maximized value of the integral of the profits after the innovation happens.5
Pollution abatement efforts A reduce the amount of pollution P in the environment:
𝑃𝑡 = 𝑃0 − ∫ 𝐴𝑑𝑡∞
0 ≥ 0 (4)
It is assumed that the initial level of abatement efforts is normalized to 1: 𝐴0=1/a
The representative firm’s problem is to choose intertemporal paths of the control variables
I, A and M with a view to maximizing (3) subject to Eqs. (1), (2) and (4). The Hamiltonian of the
problem is:
𝐻 = 𝑒−𝑟𝑡{ℵ(𝑉)[𝜋(𝐾)𝑘 − 𝐼 − 𝑎𝐴𝐶(𝐼 − 𝑀)] + 𝑤(𝑉)ℎ(𝑀)ℶ(𝑘, 𝐴) + 𝑞(𝐼 − 𝑀) + 𝛾ℎ(𝑀)} − 𝜇𝐴
(5)
Where q and are the co-state variables for the dynamic constraints (1) and (2) respectively.
From the first order conditions for investment I we derive the Green Tobin’s q:
𝐻𝐼 = 0 → 𝑞 = ℵ(𝑉)[1 + 𝑎𝐴𝐶′(𝐼 − 𝑀)] (6)
5 See Dasgupta (1982) for a discussion.
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Note that in the absence of R&D in green technologies, M=0, we have no uncertainty and
the level of pollution abatement efforts is at their initial level: 𝐴0=1/a. As a consequence, Eq.(6)
yields the well-known Tobin’s q:
𝑞 = [1 + 𝐶′(𝐼)] (7)
According to Eq. (7) the cost of acquiring a unit of capital equals the purchase price (fixed at 1)
plus the marginal adjustment cost. Note that in the steady state, I=0 and q=1.
Comparison of Eqs. (6) and (7) shows that the Green Tobin’s q depends on the stock of
knowledge V, pollution abatement efforts A and R&D expenditures M. However, in order to fully
examine the determination of the Green Tobin’s q we need to take into account the remaining first
order conditions [FOC] of the problem:
𝐻𝐴 = 0 → 𝑒−𝑟𝑡{ℵ(𝑉)[−𝑎𝐶(𝐼 − 𝑀)] + 𝑤(𝑉)ℎ(𝑀)ℶ𝐴(𝑘, 𝐴)} = 𝜇 > 0 (8)
𝐻𝑀 = 0 → ℵ(𝑉)[𝑎𝐴𝐶′(𝐼 − 𝑀)] + 𝑤(𝑉)ℎ′(𝑀)ℶ(𝑘, 𝐴) = 𝑞(𝐼 − 𝑀) − 𝛾ℎ′(𝑀) (9)
�̇� − 𝑟𝑞 = −{ℵ(𝑉)𝜋(𝐾) + 𝑤(𝑉)ℎ(𝑀)ℶ𝑘(𝑘, 𝐴)} (10)
�̇� − 𝑟𝛾 = −{ℵ′(𝑉)[𝜋(𝐾)𝑘 − 𝐼 − 𝑎𝐴𝐶(𝐼 − 𝑀)] + 𝑤′(𝑉)ℎ(𝑀)ℶ(𝑘, 𝐴)} (11)
Equations (8) and (9) equal marginal costs to marginal benefits of pollution abatement
efforts and R&D expenditures, respectively. Eq.(10) equals the marginal revenue product of capital
to the opportunity cost of a unit of capital, given by the difference between foregoing interest rate
and capital gains 𝑟𝑞 − �̇� . In the same vein, Eq.(11) equals the marginal revenue product of
knowledge with the opportunity cost of a unit of knowledge.
Consider the steady state, where �̇� = �̇� = �̇� = �̇� = 0 , in the system of equations (1), (3),
(4), (6), (8)-(11) which determines the optimal values of 8 endogenous variables I, A, M, V, q, k,
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and . The system is block recursive causal. Equation (3) determines the equilibrium value of
M, and Eq. (4) the equilibrium value of A, then, given A, Eq.(1) determines the equilibrium value
of I. Given A, M, and I, the sub-system (6) and (9)-(11) determine simultaneously the optimal
values of V, q, k and . Finally, the last endogenous variable determined by the model is
In accordance with this block recursive structure of the model, one can write the Green
Tobin’s q as a function of pollution abatement efforts [proxied by environmental expenses] A,
stockholder proposals for green effort a, R&D expenditures M, stock of knowledge [given by
patents] V, firm’s capital stock [given by Assets] k and investments I.
𝑞 = 𝑞(𝐴, 𝑀, 𝑉, 𝑘, 𝐼, 𝑎) (12)
Due to the complexity of the model, related to the probability distribution of green
innovations, we are unable to do a comparative statics analysis of the model in order to determine
a priori the impact of each variable on the Green Tobin’s q. This is an empirical task which is
carried out in the next sections, in which we examine the firm’s green efforts – abatement, clean
R&D and knowledge, A, M, and V, respectively – and the exogenous green effort of stockholder
proposals, a.
4. Green Effort: Technology and Pressure
The main intent of this paper is to derive a theoretical proof of Green Tobin’s q as shown
in the preceding section, and then apply it to two of the aforementioned parameters on green effort:
technology and pressure. This effort is examined both internally of firms for green technologies
that they research and develop then file a patent to protect, and externally by shareholders who
apply green pressure through their proposals to address climate change issues. In the next section,
we gauge the marginal contribution of additional green effort by both owners and agents, where
The Green Tobin’s q Faria and Tindall
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Green q theory explores empirical application suggested by the literature. Before that, we examine
recent trends in these green efforts.
Figure 1 presents green tech effort by all major firms in the petroleum industry over two
decades. Patented effort, presumably, is not just to greenwash websites, financial statements and
presentations meant to impress investors and allay the public. Such effort cuts straight to a firm’s
competitive edge in what it means to offer new products or processes or improvements upon them:
in this case, patents on green technologies. While patenting activity may not entirely represent all
technological effort a firm exerts towards its value proposition, patents certainly do represent those
technologies that firms are willing to defend their right to enjoy exclusive use or use for a fee. In
other words, the risk of exposing technologies (by making public through the patenting process)
is worth the right to fight for the rent saved or collected. In this sense, patents would be an
expensive way for a firm to artificially green its processes and products. Patents expose a firm to
expropriation and the upfront legal expenses in hopes of recovering damages incurred and proven
in a court of law. For these reasons, patents filed by the major petroleum firms which mention
carbon emissions6 can be reasonably assumed to address one of the more pressing environmental
6 While several phrases and words were considered, “carbon emission” adequately represents issues related to greenhouse gases and climate change. While methane, sulfur and other gases do contribute to the issue, carbon emissions are always the first addressed by petroleum firms in their public statements about climate change. Further, mentioning “carbon emission” in a patent lends the phrase some weight for enforcement, i.e. patents must be specific enough to identify a feature to which a legal right can attach. A general phrase like greenhouse gases might make a patent too obscure or ambiguous to enforce.
In scanning the actual patents, themselves, many are even more specific: e.g. “low carbon emissions.” However, it would be difficult to imagine any patents that seek to secure a right to increase carbon emissions. That firms include carbon emission in a patent implies some efficiency or reduction in the process or product. For all these qualifications, carbon emission in patents filed is believed to represent green technological effort in an unambiguous manner. The literature has struggled to identify (Konar and Cohen, 2001) or agree upon an objective measure of environmental performance. One of the most commonly used measure is the MSCI-KDL index, which is a composite of environmental, social and governance indicators rendered by expert opinion but opinion, nonetheless. Patents are risky endeavors with a forward-look expressed by firms at a point in time when filed.
As an alternative to carbon emission patents, we also follow Flammer’s (2018) investigation of green bonds. Similarly, she studies “green patents” and defines them as those patents with certain CPC (Cooperative Patent Classification) codes (see her footnote 21), then takes the ratio of green to total patents in a given year to find a mean of .14 for green bond firms and .128 for matched firms without green bonds. Likewise, for robustness, we replace “carbon emissions” with CPC with the Y02 classification for patents TECHNOLOGIES OR APPLICATIONS FOR MITIGATION OR ADAPTATION AGAINST CLIMATE CHANGE. Our results in the regressions that follow are comparable to those using an alternative definition. See appendix table 15.
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issues facing oil firms: climate change. More generally, these carbon emission patents are a good
proxy for a green technological effort at the firm level that is relevant to a particular industry.
Insert Figure 1
To put this green tech effort in perspective, it would be helpful to know how much total
tech effort a firm expends on all patents. Further, vast differences in legal institutions might make
more or less “patenting sense” in different countries, as the enjoyment of the legal right to a patent
might make the effort involved more or less attractive. Particular to each firm, an overall strategy
(e.g. Porter’s differentiation or low-cost leader) might also incline a firm to patent more or less.
Whatever the reason or predisposition, the relative effort of green tech to all technology is more
informative than the number of carbon emission patents in Figure 1 above. The percentage of
green patents to total patents implicitly considers a tradeoff or crowding of competing technologies
(Popp and Newell, 2014), as the green effort may have been deployed elsewhere in the firm. To
this end, Figure 2 demonstrates the percentage that carbon emission patents are of total firm patents
for each of the major oil firms in the world that file patents.
Insert Figure 2
There are marked differences in the emphasis that individual firms place on these carbon
emission patents, even within the same country. Some firms are increasing their relative green
The Green Tobin’s q Faria and Tindall
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tech efforts, while others are deemphasizing it. Some have clear direction, while others lack focus.
Petroleo Brasileiro in Brazil, Eni in Spain, Royal Dutch Shell in the UK and ExxonMobil in the
US have fairly distinct patterns of increasing their relative green efforts, while Chevron and
PetroChina exhibit discrete declines in such efforts. Still other firms appear to be indecisive in
their efforts: Sasoil in South Africa and Total in France.
Although we are concerned with firm-level evaluation, the relative green tech effort by
country is offered in Figure 3. The relative size of the annual contribution of green technologies
to the global stock of knowledge in the oil industry displays a slight increase. Carbon emission
patents rise from just below to just above 10% of all patents filed. These green efforts are led by
the UK, US and Continental Europe. Countering the trend, China and the Rest of the World have
declined in their proportions of carbon emission patents to total patents over time, which are also
the lowest levels of the countries.
Insert Figure 3
To help narrow differences between firms and focus on countries experiencing similar
economic trends in developed markets, Figure 4 provides a comparison of these green tech efforts
between the US and UK, which should have meaningful implications to value, i.e Tobin’s q.7 In
the United States, ExxonMobil (“Exxon”) has increased its percentage of green patents over time,
while Chevron has decreased its percent of patents that reference carbon emissions. The same can
7 As will be discussed in the section that follows, the sample used for empirical tests comprises these four US and UK firms: ExxonMobil, Chevron, BP and Shell. The sample time period is the 20-year period from 1998 to 2017, even though events and developments outside this time period are discussed here for their importance.
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be observed of the two major petroleum players in the United Kingdom: Royal Dutch Shell
(“Shell”) has increased their relative green tech effort over time, while British Petroleum (“BP”)
has decreased its relative number of carbon emission patents. This dynamic variation of green
attributes over time for highly comparable firms provides an excellent opportunity to distill the
function of this green attribute on Tobin’s q.
Figure 4 provides a timeline comparison of the relative green efforts of US and UK
petroleum firms. Importantly, these four firms also list each other as direct competitors in their
annual reports. It is worth noting that, despite the opposing patterns, it is only more recently that
Exxon and Shell have risen to the higher levels that BP and Chevron started with at the beginning
of the sample period.
Insert Figure 4
It is also worth revisiting the number of patents each firm generates. Figure 5 demonstrates
the total contribution that these four firms make public of their green tech efforts by filing patents.
In all but one year, 2009, Exxon has filed more green patents than each of the other three firms, at
times multiples more than the others combined. Exxon’s increasing trend in relative green tech
efforts (Figure 4) combined with the number of these patents (Figure 5) is suggestive of this firm’s
green effort: its stock of knowledge, V, and its annual contribution to this stock through R&D
expenditures, M. Interestingly, the peak of the combined green tech efforts during the sample
period of these four firms occurs in 2012 and has steadily declined. Referring back to Figure 1,
globally there has not been an overall decline in green tech effort. China has filed enough carbon
emission patents to compensate for the decline observed in Figure 5 by the US and UK. So while
The Green Tobin’s q Faria and Tindall
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the issue of climate change persists – technology has yet to “solve” the problem – the collective
green tech efforts of the four major US and UK firms may have declined since 2012.
Insert Figure 5
Before bringing Tobin’s q into the discussion, the pressure on firms to address global
warming has intensified over time, which can be thought of as green pressure, a, in the model. A
reasonable proxy for this pressure is observed in shareholder proposals related to climate change,8
which may or may not come to a vote at annual meetings. As Buchanan, Netter and Yang (2010)
explain, shareholder proposals are quite different in the US and the UK. In the United States,
shareholder proposals are advisory only, regardless of vote outcome. In the United Kingdom,
shareholder resolutions are binding when they gather majority support. Proposals are common in
the US, rare in the UK. Broadly speaking, shareholder proposals are persuasive in the US and
coercive in the UK. Despite the differences, proposals in either country are explicit expressions
of owner concerns. No need to deduce or guess what the owner-agent conflict is. The conflict is
stated in publicly filed documents (Form DEF 14A with the SEC, or the Notice of Meeting in the
UK). Importantly, these notices are made, forms are filed and the annual meetings occur much
earlier than fiscal year end, which factors when considering the effect of time. Annual meetings
are generally held from April to June. The four major oil firms in the US and UK all held meetings
in late-May in 2019. Thus, a built-in lag exists between fundamental data and shareholder
proposals information.
Such concern expressed by shareholding investors helps to attribute the pressure toward
8 A proposal is considered to be related to climate change if the proposal uses the phrase “climate change” anywhere directly in the resolution. Although imperfect, this qualification is objective and unambiguous.
The Green Tobin’s q Faria and Tindall
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value-relevance, as opposed to general, stakeholder desires (Deng et al., 2013; Renneboog, Ter
Horst, & Zhang, 2008a). Concern over climate change voiced by proposals should speak to firm
fortunes, at some point, if investors are rational. While the intensity of this concern or pressure
varies over time and between countries, there are some interesting dynamics which have taken
place at annual meetings of these four firms recently.
While Exxon received its first proposal related to climate change in 1996, it would not be
until 2017 that a majority of shareholders would support such a resolution. (No board or
management in the US has ever supported a proposal related to climate change.) Subsequent
proposals in 2018 and 2019 of a similar ilk in the US have fallen far short of majority support. A
proposal to create a climate change board committee gathered only 7.4% of the vote at Exxon’s
2019 annual meeting. Similar pressures have mounted and released at Chevron over the years. In
2018, “Chevron shareholders rejected two climate change resolutions at the oil giant's annual
meeting, upsetting activists who are pressuring fossil fuel companies to curb crude oil production
and reduce greenhouse gas emissions.”9 In 2019 at Chevron’s annual meeting, shareholders
rejected two proposals related to climate change: a proposal for a report on reducing carbon
footprint gathered 33.2% of the vote, while a proposals to create a climate change board obtained
only 7.6% of shareholder support.
In 2015, both UK oil firms received their first shareholder proposals related to climate
change and, surprisingly, the management of both firms supported these proposals. Both 2015
proposals received near unanimous shareholder approval: 98.91% of the vote for Shell’s
Resolution 21, and 98.28% for BP’s Resolution 25. Every year since 2015, Shell has received a
9 Siegel, J. May 30, 2018 02:33 PM. Washington Examiner, “Chevron shareholders reject climate change resolutions.” https://www.washingtonexaminer.com/policy/energy/chevron-shareholders-reject-climate-change-resolutions
https://www.washingtonexaminer.com/policy/energy/chevron-shareholders-reject-climate-change-resolutions
The Green Tobin’s q Faria and Tindall
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similar shareholder resolution, but without management support these resolutions have gathered
only 2.78%, 6.34% and 5.54% of the vote from 2016 to 2018, respectively. In 2019, such a
resolution was withdrawn from Shell’s annual meeting. At BP’s annual meeting in 2019, however,
two resolutions on climate change were introduced. Management supported Resolution 22 which
received 99.14% of the vote, while Resolution 23 gathered only 8.4% support from other
shareholders without management’s approval. Clearly, not only is there wide variation in support
for green pressure among these four firms, but there is wildly divergent support for this pressure
for the same firm in the same year.
Taken together Figure 6 presents the number of proposals that these four firms have
experienced. Clearly, green pressure on all four firms by their shareholders has intensified and
subsided over time, with vote outcomes indicating a peak in 2015 in the UK and in 2017 in the
US, thus far at least.
The variation of green pressure in “climate change” shareholder proposals and green tech
efforts in carbon emission patents over two decades for these four direct competitors should be
priced in the market. Although the two largest firms in each country, Exxon and Shell, have
intensified their relative green tech efforts, so have their shareholders pressured them to address
climate change issues. Our theoretical model explains how Green Tobin’s q is a function of these
green efforts, but it remains to be seen if these additional green technologies gain firms a valuable
advantage and whether incremental shareholder pressure is beneficial to shareholder wealth.
Insert Figure 6
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5. Green Tobin’s q in the Oil Industry
In this section we perform econometric tests of the theoretical model with data from the oil
industry over the twenty-year period from 1998 to 2017 for the four US and UK firms discussed
above: Exxon, Chevron, BP and Shell. Table 1 describes the variables we use in our tests, how
they are calculated and the sources from which they are collected. Fundamental accounting and
year end stock price data is taken from Compustat and Datastream. The patent information is
collected from Google Patents. The shareholder proposal data is located with assistance from
SeekEdgar10 developed by Raj Srivastava and supplemented with text searches from the SEC
Edgar site, as well as reviewing firm websites. Other information (e.g. environmental abatement
cost) is collected from 10-Ks and company websites, as indicated.
Insert Table 1
The literature offers several versions of Tobin’s q. Chung and Pruitt (1994) test different
versions and show little empirical difference between their simple, conservative one and more
complicated versions (Lindenberg and Ross, 1981) that are computationally demanding, require
subjective assumptions and for which data may not be available. For these reasons, we follow the
literature (King and Lennox, 2002) and opt for the simple version of Tobin’s q, calculated as the
market value of equity plus the book value of preferred stock, long term debt and current liabilities
net of current assets, all scaled by the book value of total assets. As derived in section 3 above, q
10 https://www.seekedgar.com/
https://www.seekedgar.com/
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as a function of abatement A, R&D expenditures M, stock of knowledge V, firm’s capital stock k,
investments I, and stockholder proposals a.
𝑞 = 𝑞(𝑉, 𝑎, 𝐴, 𝑀, 𝑘, 𝐼) (12)
The green variables we are particularly interest in are Percent Carbon Emission Patents
(V), which is the ratio of Carbon Emission Patents to Total Patents, and Proposals (a), which is the
number of shareholder proposals per year that a firm receives containing the phrase “climate
change.” The variables are proxied as follows: Abatement (A) is environmental capital
expenditures scaled by assets.11 R&D (M) is scaled by assets. Capital stock (k) is the natural log
of assets. Investments (I) is capital expenditures scaled by sales.
Insert Table 2
Table 2 contains descriptive information about the four major oil firms in the US and UK
from 1998 to 2017. Tobin’s q ranges from well below unity (min .46) to more than double (max
2.26) with a mean just above unity (1.19) relating market values to replacement costs. On average
over time, the market views these four oil firms with opportunities to grow. The average US/UK
oil firm files patents on “carbon emissions” that are 14% of its total patents filed. As mentioned,
shareholder proposals are rare in the UK but common in the US. Shell received two proposals
related to climate change in 2019, while Exxon received six climate change proposals in 2016.
The pairwise correlations between these variables is presented in
Table 3.
11 The abatement costs could only be found for Exxon and Chevron. Consequently, abatement is only included in section 6. Robustness and Extensions.
The Green Tobin’s q Faria and Tindall
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Insert
Table 3
The correlations of interest are those between Tobin’s q and green effort: the percent of
carbon emission patents and climate change shareholder proposals. A strong, negative correlation
exists between the percent carbon emission patents and Tobin’s q with an economic significance
of -0.357 and statistically significant at the 1% level. Green pressure has a weaker, positive
correlation with Tobin’s q of 0.257, marginally significant at the 5% level. Other correlations with
Tobin’s q are similar to the literature: negative with capital stock and investment, and positive with
R&D and abatement costs. Interestingly, there is no significant correlation between green pressure
(proposals) and green tech (percent carbon emission patents), either economically or statistically
(-.105), which lends credence to the proxies of green effort not capturing the same phenomena.
As Tobin’s q is the focus of our theoretical derivation and empirical conjecture,
understanding how q has trended over time for these four firms is critical to distilling the green
influences on it. Figure 7 (collectively) and Figure 8 (individually) exhibit the decline of Tobin’s
q for these four major petroleum firms over time. Figure 7 demonstrates the relative standing of
each firm’s q as competitors, where Exxon continues to hold its lead despite the downward trend.
Further, Figure 7 shows that only the trend for Exxon has a q above unity throughout the sample
period. Another interesting trend is the near identical average values of q that both British firms
have experienced over the sample period.
Insert Figure 7
The Green Tobin’s q Faria and Tindall
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Figure 8 highlights a few important observations. First, although Exxon’s q remains above
unity, it continues a downward trend in 2017 and 2018, while those of the other three oil firms
have recently experienced upticks in their q (i.e. above the fitted trend line). If green tech effort
creates growth opportunities and green pressure is valuable, Exxon should be gaining an advantage
over its competitors, as Exxon has filed the greatest number carbon emission patents, has the
greatest increase in relative green efforts in the most recent years and has experienced the most
shareholder proposals. Yet, by comparing the data points (in blue) to the linear trend line (in red),
Exxon’s q appears to be declining at a greater rate than its historical average rate of decline and
the gap between Exxon’s q and Chevron’s q appears to be shrinking. Based on casual observation,
the coincidence of these trends calls for caution in the merit of green tech effort and the wealth
benefit of green shareholder pressure.
Insert Figure 8
The correlation of interest can also be view in Figure 9 and Figure 10, where Tobin’s q is
plotted against the Percent Carbon Emission Patents: a distinct negative relationship for the
industry leaders of each country, Exxon and Shell, an ambiguous relationship for Chevron and BP.
The strong negative correlation from
Table 3 may be attributable to the industry leaders of each country. In Figure 9, the four
competitors’ relationship of q to green tech effort is displayed together along with the average
(black line). In Figure 10, these same relationships are presented for each firm individually,
highlighting that different levels of green tech effort made little difference in q for BP and Chevron,
The Green Tobin’s q Faria and Tindall
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while higher levels of green tech effort are associated with lower Tobin’s q for Exxon and Shell.
Insert Figure 9
Insert Figure 10
To combine the preceding associations over time for the major US and UK petroleum
firms, ordinary least squared regressions provide guidance. Table 4 addresses the impact on q that
green tech efforts and shareholder pressures have. The first two regressions reflect the correlations
established above: (1) a negative one between Green Patents and q, and (2) a positive correlation
between Green Proposals and q. When other variables are added to the regression, the coefficient
on Green Patents (the percent of carbon emission patents to total patents) retains significance at
the 5% level but becomes indistinguishable from zero when time and firm invariant factors are
added. The coefficient on Green Proposals (the number of shareholder proposals that mention
climate change) retains significance at the 1 percent level in all models. The initial correlations,
either displayed in the graphs or calculated in pairwise, continue be negative for Green Patents and
positive for Green Proposals when estimated by ordinary least square regressions.
Insert Table 4
To evaluate multi-collinearity, variance inflation factors (VIF) are calculated for regressors
in model 6 of Table 4, or the reciprocal of 1-R2 of each independent variable, i.e. the variance of
an independent variable unrelated to the other independent variables. In regression 6 of Table 4,
92.2% of the variation is explained. Table 5 presents the calculations for VIF.
The Green Tobin’s q Faria and Tindall
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Insert Table 5
Consensus is that multi-collinearity is a cause for concern when variance is inflated 10
times or more. Table 5 reports that capital stock, k, raises concerns about collinearity, while the
average VIF for the entire model flirts too closely with the rule-of-thumb without some
transformation of the variables. Further, all variables are tested for their stationarity using the
Levin-Lin-Chu test, as there is a balanced panel and the sample is limited to the four US/UK firm
while time can expand, i.e. satisfying the their assumption that N number of firm be small relative
to T, time.12 Only for Capital Stock do we fail to reject the hypothesis that k contains unit roots
and conclude that the variable is non-stationary. To allow for the possibility of cross-sectional
correlations, we also specify the demean option for the Levin-Lin-Chu test, which fails to reject
the null for Capital Stock. These tests confirm the need to remove the trends from the variables.
To address multi-collinearity and ensure an accurate interpretation on the significance of the
coefficients, the independent variables are orthogonalized in Table 6.
Insert Error! Reference source not found.
Table 6 orthogonalizes the independent variables in an effort to separate variation in
sequence, i.e. to remove collinearity sequentially. Since Capital Stock displays an undesirable
variance inflation factor, it is orthogonalized first, with the other independent variables
orthogonalized in the order shown. In doing so, the relative Green Patents of these four US and
12 See https://www.stata.com/manuals13/xtxtunitroot.pdf p. 9.
https://www.stata.com/manuals13/xtxtunitroot.pdf
The Green Tobin’s q Faria and Tindall
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UK firms are shown to negatively influence Tobin’s q with a level of significance at the 5% level
or better, until firm invariant factors are added to the regressions. Thus, with the elimination of
the strong time trend that still existed Table 4 through orthogonalization the steady-state
relationship of V: Green Patents emerges in Table 6. As in the preceding regressions, Green
Pressure positively impacts q in all specifications at the 1% level. When the variables are
orthogonalized, the overall decline in q over time for the major petroleum firms as shown in Figure
9 finds a reliable explanation in both green measures: as the percentage of carbon emission patents
increases, Tobin’s q decreases.
The preceding tables follow prior literature which considers environmental and financial
performance concurrently before addressing causation (Chappel et al, 2003; Dowell et al, 2000;
King and Lennox, 2002; Konar and Cohen, 2001; Lioui and Sharma, 2012; Iwata and Okada,
2011). Given the all-inclusive nature of Tobin’s q, prior observations of q might explain it better
than any of the explanatory variables. To identify the unique impact that Green Patents and
Proposals, Elsayed and Patton (2005) evaluate environmental performance and financial
performance by employing the Arellano and Bond (1991) estimation method. This procedure uses
a generalized method of moments (GMM) approach which takes lagged differences and uses them
as instruments for the endogenous variables, in this case the first two lags of Tobin’s q. Table 7
reports the results of the Arellano-Bond estimation.
Insert Table 7
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As Dowell et al., (2001) suggest, there is no a prior basis for suspecting which lags are
most appropriate for explaining Tobin’s q. Thus, several combinations of lags are offered in Table
7. Only the second lag of Green Patents indicates a reliably, negative impact on q in model 1.
With Green Proposals, a positive impact on q occurs concurrently, while a negative impact is
reliably estimated in models 1 and 2. To test identification, serial correlation occurs in the first
(instrumented) lag of Tobin’s q for models 1 and 2, but no such correlation exists in the second
lag of the differenced estimates, thus validating the inference of the GMM estimator in the first
two models only. Model 4 is the regression closest to the one specified by Elsayed and Patton
(2005), however the AR(1) statistic (at the bottom) is insignificant. Although the choice of lag
lengths has an impact on making any causal claims, the Arello-Bond estimation method confirms
the generally negative impact that Green Patents have on Tobin’s q and the positive one that Green
Proposals have on Tobin’s q. Green effort matters to q.
6. Robustness
Instead of carbon emission from Google Patents, we employ Patstat, the database for
“green patents” that Flammer (2018) uses to investigate the real impacts of green bond issues and
that Aghion et al (2016) use to examine carbon taxes for the auto industry. The Cooperative Patent
Classification (CPC) is an international system jointly developed by the US and European Patent
Offices and adopted throughout the world.13 Following Flammer (2018), we use the codes
believed to be most applicable to green effort: the Y02 series (technologies or applications for
mitigation or adaptation against climate change). The subclassifications of Y02 (A, B, C, D, E, P,
T and W) provide granularity as to the type of climate change patent. To get a sense of which of
13 See https://www.uspto.gov/patents-application-process/patent-search/classification-standards-and-development.
https://www.uspto.gov/patents-application-process/patent-search/classification-standards-and-developmenthttps://www.uspto.gov/patents-application-process/patent-search/classification-standards-and-development
The Green Tobin’s q Faria and Tindall
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the Y02 patents are most numerous for Exxon, Chevron, BP and Shell, Figure 11 displays the
combined green effort of these firms for Y02 patents filed in the United States, Europe and Japan,
or the triadic patents, following Aghion et al (2016).
Insert Figure 11.
The most numerous are Y02P: CLIMATE CHANGE MITIGATION TECHNOLOGIES IN THE
PRODUCTION OR PROCESSING OF GOODS. Next are Y02E: REDUCTION OF
GREENHOUSE GAS [GHG] EMISSIONS, RELATED TO ENERGY GENERATION,
TRANSMISSION OR DISTRIBUTION. The remaining Y02 classifications comprise a small
fraction of the Y02 CPC classification. Like Flammer, we compare the number of green patents
to total patents and use this ratio as a variable of interest for in the Green Tobin’s q.
Insert Table 8
The OLS regressions in Table 8 replicate model 6 in Table 4, which include time and firm
invariant factors. Only Y02E patents allow inference distinguishable from zero. Here, as a percent
of total firm patents, climate change patents related to energy transmission, generation or
distribution have a negative impact on q that is significant at the 1% level or better, with 93% of
the variation explained by the model.
Insert Table 9
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Table 9 considers only the two major US firms, Exxon and Chevron, which provide
information about their worldwide environmental abatement costs in their annual 10K filings.
These abatement costs include both operating expenses and capital expenditures, which are scaled
by assets. As shown in Table 9, green patents remain significantly negative, green pressure
continues to be strongly positive, but only environmental capital expenditures have a significant
relationship with Tobin’s q once other controls are added in model 5, which is positive and
significant at the 5 percent level. By expanding the sample to include the major oil firms around
the world, our results are robust to our main findings: green tech effort has a negative relationship
with Tobin’s q, while green pressure has a positive relationship with Tobin’s q. By limiting the
sample to US firms only, our results are also robust and reinforce Table 8 in which our inference
survives firm invariant factors.
Overall, our results align with Eccles and Serafeim (2013) who explain how only major
innovations boost both ESG and financial performance. Therefore, we do not find it surprising
that green patents, on average, have a negative impact on Tobin’s q.
7. Concluding Remarks
The main purpose of this paper is to derive the Green Tobin’s q for the literature at the
intersection of environmental and financial performance. To this end, we put forward a dynamic
stochastic model of firm investment in which a representative firm invests in pollution abatement
and R&D in green technologies, investments that stockholders pressure their firms to address
environmental issues. Optimality conditions indicate that the firm’s Tobin’s q must reflect its
green efforts. The derived Tobin’s q is a function of pollution abatement efforts, stockholder
The Green Tobin’s q Faria and Tindall
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proposals for green effort, R&D expenditures, stock of knowledge [given by patents in green
technologies], firm’s capital stock and investments. Using data from the oil industry this paper
also tests the derived model. Our empirical application of the Green Tobin’s q includes green
patents, green pressure and abatement costs.
As theorized, the Green Tobin’s q is a function of firm green efforts. Our results hold for
most of the empirical specifications, survive more of the causality exercises than the reverse, and
are reinforced by alternative data sources for the variables of interest. Regression results indicate
that patents and R&D of green technologies have a negative impact on Tobin’s q, while
stockholder pressure has a positive impact. Given the tailored sample but one over a lengthy period
at the epicenter of an important environmental issue, it may appear surprising that the green patents
for these oil firms deter investment, while stockholder proposals encourage it. However, this
finding makes sense once we consider what the Green Tobin’s q functions as: an integral of
maximized profits based on dynamic constraints and the chances of success or failure. Our
theoretical model and empirical evidence aligns with Manso’s (2011, p. 1824) suggestion to
encourage innovation: “shareholders may want to motivate a CEO to pursue more innovative
business strategies…[or] regulators may want to stimulate entrepreneurship, say, through the
design of…” clean energy subsidies and carbon taxes. Such motivation requires tolerance for loss
or the chance taken on innovation. Indeed, these green firm efforts – abatement, clean R&D and
knowledge – are some hard truths on oil and climate change that Ben van Beurden must also
balance, while the exogenous pressure from shareholders weighs in hopes of favor. The question
that the Green Tobin’s q hopes to answer is how seriously green effort should be taken. The
evidence we provide suggests that these firms may be taking green patents too seriously, while
firms would be wise to heed green stockholder proposals.
The Green Tobin’s q Faria and Tindall
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Figures
Figure 1 Collective Green Technology Effort over Time
This figure represents green tech effort over time by the major petroleum firms around the world that file carbon emission paten
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