The value for service industry firms of environmental initiatives

Purpose – This study aims to examine the impact of taking environmental initiatives on the returns for service companies. Design/methodology/approach – The authors gathered data for firms that are recognized for their leadership in environmental responsibility using a well‐known social responsibility ranking list. These data were used to compare with those that were ranked high on the index with those that were ranked lower, using Jensen's alpha and Sharpe ratio performance measures relative to a benchmark. Findings – The upper‐ and lower‐ranked socially responsible firms had significantly higher risk adjusted returns and superior performance than the benchmark. Additionally, there is evidence that firms ranked in the lower group are better valued overall. Research limitations/implications – A higher return for socially responsible firms suggests that public investors value environmentally‐friendly firms more highly today. Future research could build on this study by examining additional performance measures including four‐factor models and conditional variance. Practical implications – The study suggests that a service company's commitment to environmental initiatives and the recognition of its commitment is an important signal today for the investor. Originality/value – While prior research has considered manufacturing companies, this is the first study to examine the impact of a commitment to environmental initiatives for service industry firms. The findings of the empirical examination support the benefits of green initiatives to a significant component of the US economy.