The effect of ISO 14001 on equity structure

Purpose – The purpose of this paper is to investigate the effect of ISO 14001 certification on US public firms’ equity structure regarding whether the typical heavy investment required for environmental management system is justified in terms of equity risk. Design/methodology/approach – This study employs the event study methodology and examines the pre- and post-movements of firms’ equity structure around the ISO 14001 certification date. This study investigated 5,189 listed firms in the New York Stock Exchange and National Association of Securities Dealers Automated Quotation and the abnormal performance of firms’ equity structure was measured by using four dependent variables (assets, liabilities, debt ratio (liabilities/equity), and market-to-book ratio of equity). Findings – The results showed that the adoption of ISO 14001 increased a firm's total assets, liabilities, and debt ratio in the long run, implying that pursuing the certification entails the increase in a firm's size and equity risk. The long-term movement of the market-to-book ratio of equity showed no abnormal performance, while it fluctuated in the short term. Practical implications – This study suggests that managers should consider the potential risk from a firm's equity structure when they decide to pursue the ISO 14001 certification. Originality/value – This study is the first effort to investigate the long-term effect of ISO 14001 certification on the firm's equity structure using the event study methodology in the USA.