Stock Market Reaction to Environmental Performance: The Role of Organizational Reputation as an Interpretive Lens

Abstract

Stakeholders often evaluate firms with strong reputations more favorably. However, a growing stream of research also suggests that a high reputation may lead to negative evaluations. We attempt to reconcile these contrasting viewpoints in the context of corporate environmental sustainability. Assuming that stakeholders use organizational reputation as their interpretive lens, we examine how the stock market evaluates firms with varying levels of environmental performance. Analyzing 667 public disclosures of greenhouse gas emissions by U.S. firms between 2015 and 2021, we find that firms with lower reputations receive more favorable stock market reactions when their environmental performance exceeds expectations, suggesting that low reputations can function as an asset. Conversely, the negative stock market reaction to firms’ environmental performance falling below expectations is mitigated for firms with higher reputations, indicating that high reputations serve as an asset in this context. We offer important insights, highlighting the organizational reputation’s role as an interpretive lens through which the stock market asymmetrically evaluates firms’ environmental performance.