Grantee Research Project Results
2005 Progress Report: Institutions for Removing Information Asymmetries in the Market for Corporate Environmental Performance
EPA Grant Number: R831733Title: Institutions for Removing Information Asymmetries in the Market for Corporate Environmental Performance
Investigators: Terlaak, Ann
Institution: University of Wisconsin - Madison
EPA Project Officer: Hahn, Intaek
Project Period: October 1, 2004 through September 30, 2007 (Extended to September 30, 2008)
Project Period Covered by this Report: October 1, 2004 through September 30, 2005
Project Amount: $76,083
RFA: Corporate Environmental Behavior and the Effectiveness of Government Interventions (2004) RFA Text | Recipients Lists
Research Category: Environmental Justice
Objective:
The objective of this research project is to assess the conditions under which certification of environmental management practices removes information asymmetries between firms and stakeholders by credibly signaling about superior environmental performance. One issue that may limit the ability of certification schemes to signal about superior environmental performance is that the practices that are being certified may shape the very attribute about which certification signals, such that environmental performance is endogenous. This would limit the ability of certification to communicate about cross-firm performance differences. Another issue may be that varying signaling equilibriums occur such that in some industries, only firms with average environmental performance certify. Understanding these issues is critical for the ability of policymakers and stakeholders to draw correct inference from certification of environmental management practices.
Progress Summary:
A conceptual analysis reveals that the two unique elements of certified environmental management standards—codification and certification of best practices—both enable and restrict the ability of management standards to signal about superior performance and guide socially desired firm behaviors. The two elements are enabling because they allow a certified standard to shape firm behaviors in settings in which other soft-law institutions (like norms) are ineffective. They also are limiting, however, because the codification of best practices likely induces low-quality firms to adopt the standard (in the hope of furthering their performance), whereas certification of best practices likely entices high-quality firms to adopt. Having such mix of firms selecting into adoption is problematic. First, participation by both low- and high-quality firms reduces the standard’s ability to signal to stakeholders about absolutely superior environmental performance levels. Second, it confuses the market about the function of the standard—is it a tool for improvement (as participation by lower quality firms would suggest) or a signal of superior environmental performance (as indicated by participation of high-quality firms)? This confusion is detrimental to the standard’s effectiveness because it causes inconsistent enforcement by market participants. Yet the ability of a soft-law institution like a management standard to guide firm behaviors in desired ways critically relies on the consistency of its decentralized enforcement processes.
Empirically, I have explored the occurrence of different signaling equilibriums; that is, I have explored whether and when firms with average environmental performance (as captured by toxic releases relative to releases by industry peers), as opposed to higher performing firms, select into certification with ISO 14001. I expected the availability of additional information about firm environmental performance to result in average performing firms having a stronger adoption propensity than higher performing firms. This is because the additional information should cause high-performing firms to be confident that market participants will not confuse them with low-performing firms. Average-performing firms, however, might continue to worry about such confusion and therefore adopt the standard to differentiate themselves from the low performers. Thus far, however, I have found no evidence of factors such as advertising intensity, public ownership, and organizational size triggering disproportionate adoption by “medium-quality” firms. In fact, evidence so far suggests that low-quality firms (i.e., firms with poor environmental performance) select into adoption, independent of the degree to which additional information is available. This finding casts doubts that certification with ISO 14001 serves as a signal to differentiate firms with superior environmental performance and suggests that the standard may instead be used as a tool for improvement for lower performing firms. These results are preliminary, however, and require further investigation.
Future Activities:
Future activities will include further exploration of the conditions that lead to varying signaling equilibriums. Although ISO 14001 frequently seems to be used as a tool for improvement (rather than a signal of superior environmental performance), I continue to expect some cross-industry variations in the function of certified environmental management standards. For example, research suggests that the signaling benefits of the ISO 9000 quality management standard vary across the degree to which information asymmetries are present. Thus, it is possible that prior industry experiences with ISO 9000 as a signal influences the use of ISO 14001 as a signal as opposed to improvement tool.
Given the possibility of ISO 14001 playing a dual role (i.e., signaling and improvement tool), future research also will explore the conditions under which the standard can cause improvements that ultimately result in absolutely superior environmental performance—that is, when can ISO 14001 trigger improvements such that the standard not only functions as an improvement tool but also as a signal of (ex-post) superior performance? It seems plausible, for example, that environmental management standards have a greater improvement potential in industries that are less capital intensive.
Journal Articles on this Report : 1 Displayed | Download in RIS Format
Other project views: | All 6 publications | 2 publications in selected types | All 2 journal articles |
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Terlaak A. Order without law? The role of certified management standards in shaping socially desired firm behaviors. Academy of Management Review 2007;32(3):968-985. |
R831733 (2005) |
Exit Exit |
Supplemental Keywords:
social science, ISO 14001, certification, environmental management systems, information provision, signaling theory, economics, Social & Behavioral Science Research Program, sustainable industry/business, corporate performance, economics & decision making, economics and business, social science, decision-making, ISO 14001 certification, behavior change, benefits assessment, corporate compliance, corporate culture, corporate environmental behavior, corporate environmental reform, cost benefit, decision making, environmental behavior, environmental management strategies, environmental management systems, environmental management systems, EMS, environmental performance awards, outreach and education,, RFA, Economic, Social, & Behavioral Science Research Program, Scientific Discipline, Sustainable Industry/Business, Corporate Performance, Economics and Business, decision-making, Social Science, Economics & Decision Making, environmental management systems (EMS), ISO 14001 certification, environmental management systems, decision making, corporate compliance, cost benefit, environmental performance awards, corporate evironmental reform, behavior change, outreach and education, pollution prevention, environmental behavior, benefits assessment, corporate environmental behavior, corporate cultureRelevant Websites:
http://www.bus.wisc.edu/faculty/facdetails.asp?id=433 Exit
Progress and Final Reports:
Original AbstractThe perspectives, information and conclusions conveyed in research project abstracts, progress reports, final reports, journal abstracts and journal publications convey the viewpoints of the principal investigator and may not represent the views and policies of ORD and EPA. Conclusions drawn by the principal investigators have not been reviewed by the Agency.