ANALYSIS Can capital markets respond to environmental policy of firms? Evidence from Greece George Halkos a, ⁎ , Anastasios Sepetis b a Economics Department, University of Thessaly, Korai 43, Volos 38221, Greece b Laboratory Corporate Environmental Policy and Management, Environment Department, University of the Aegean, Mytilini 81100, Greece ARTICLE INFO ABSTRACT Article history: Received 25 February 2006 Received in revised form 9 December 2006 Accepted 21 December 2006 Available online 7 February 2007 In this study we attempt to evaluate the stock value of Greek firms, which apply systems of environmental management in the light of systemic risk. Risk is examined empirically with the help of conditional volatility models of investment in environmental friendly firms. The empirical analysis relies on financial econometric models, which determine the underlying conditional volatility. We find that improved environmental management system and environmental performance result in reductions in firms’ beta. Specifically, our empirical estimates show evidence of volatility clustering, short- and long-run persistence of shocks to the returns of the market and asymmetry in the leverage effect between negative and positive shocks to returns. Finally, the macroeconomic factors proposed and included in the analysis have no statistical significant influence on the beta estimates in almost all cases. © 2007 Elsevier B.V. All rights reserved. Keywords: Environmental management Systematic risk Capital market TGARCH JEL classification: G14; Q25 1. Introduction Nowadays environmental cost steadily increases and more and more firms, whose capitals are concentrated on environmental products and services, make their appearance. This raises the question whether business environmental policy and the systems of environmental management are being attuned or opposed to the evolution of the shareholder value. In order to give an answer to this question we have to analyze and find out what is being projected as evaluation of shareholder value indexes. Firms or companies, as far as their relation to the environment is concerned, are based mainly on the establishment of a flexible legal system, which is capable to promote the environmental harmonization and the effective application of the legal provi- sions. The latter is in accordance to direct and objective information towards the mass of share-hold market (share- holders–stakeholders), which expresses interest in locating enterprises with preferential discounted future business value. The improvement of the pre-mentioned relation will encourage the mass of business community to re-establish its relation to the environment. In addition, the improvement of the above relation and the financial effectiveness of every firm are directly and indirectly influenced by the capital market and the formation of the stock value within. At the same time, based on a different prospective, environmental management and policy are closely related to the modern ECOLOGICAL ECONOMICS 63 (2007) 578 – 587 ⁎ Corresponding author. Alexandroupoleos 31, Ano Melissia 15127, Athens, Greece. E-mail address: halkos@uth.gr (G. Halkos). 0921-8009/$ - see front matter © 2007 Elsevier B.V. All rights reserved. doi:10.1016/j.ecolecon.2006.12.015 available at www.sciencedirect.com www.elsevier.com/locate/ecolecon