Given the potential for measurement error for our choice of EP measures, we establish that our results are qualitatively similar using an alternate POLLUTE indicator variable based on [EP.sub.BOD].
As a control, Panels A and B of Table 2 report the results of tests of an interaction between NECE and POLLUTE. For the unscaled model where POLLUTE is based on [EP.sub.TRI], Panel A indicates that for low-polluting firms the estimated coefficient on a dollar of NECE is 3.439 (p < 0.001).
Specifically, we rank each variable except POLLUTE (i.e., V, ABV, NECE, ECE, and AE) from smallest to largest within each year and then scale it to fit between 0 and 1 by dividing by the number of firm-year observations for the given year.
The estimated ECE coefficient ([[beta].sub.2]) is positive in 11 of the 12 years with |t-statistics| > 1.65 in ten of the 12 years, the ECE * POLLUTE interaction term coefficients are negative in 11 years with |t-statistics| > 1.65 in nine years, and the estimates of [[beta].sub.7] are negative in ten years with |t-statistics| > 1.65 in nine years.
Possible causes of concern for model misspecification include potential confounds due to omitted variables, the impact of observations with negative abnormal earnings, and the use of a dichotomous POLLUTE proxy for relative environmental performance.
Specifically, it is unlikely that differences between low- and high-polluting firms would be reflected in the ECE-related coefficients but not the NECE-related coefficients if, in fact, POLLUTE simply represents an omitted confounding variable.
However, of more immediate interest, with the exception of ECE * POLLUTE, none of the interaction terms are significant.
We repeat the estimation of Equation (2) using a continuous measure, [EP.sub.TRI], instead of a dummy variable, POLLUTE, to capture relative environmental performance.
(10) To validate that our POLLUTE labeling captures the underlying construct of interest, relative environmental performance, we examine the number of environmental violations and prosecutions of 11 of our sample firms (five low-polluting and six high-polluting) covered in the Corporate Environmental Profiles Database developed by the Investor Responsibility and Research Center.
Electric utilities were given yearly allowances to pollute, largely based on what emissions were from 1985-87.
"If groups in a certain area buy enough credits, they can pollute as much as they want," says CBE staff attorney Richard Drury.
One reason for this is that when the first public allowance sale - between Wisconsin Power and Light and the Tennessee Valley Authority - was announced, the companies involved caught hell from the press for "buying the right to pollute." The TVA's executive vice president William Malec then griped to The Energy Daily that the sale "created an impression in the media that nothing less than a cabal of utility executives had conspired to pollute the environment for fun and profit," and that such bad press would have a chilling effect on utilities, which are forced to operate at the public's forbearance under layers of regulation.