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The Economic Impact of Capital Expenditures: Environmental Regulatory Delay as a Source of Competitive Advantage?

Authors

  • Carolyn Wirth,

    Corresponding author
    • Massey University, Palmerston North, New Zealand
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  • Jing Chi,

    1. Massey University, Palmerston North, New Zealand
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  • Martin Young

    1. Massey University, Palmerston North, New Zealand
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    • The paper is based upon research done by Carolyn Wirth for her PhD dissertation at Massey University, supervised by Professor Martin Young and Dr Jing Chi. The authors gratefully acknowledge the valuable comments of Andrew Stark (editor), an anonymous referee, Dennis Olson, Jenni Bettman, and participants at the following meetings: Massey University School of Economics & Finance Seminar 2010, the 15th New Zealand Finance Colloquium 2011, the 2011 FMA Asian Conference and the 2nd Finance and Corporate Governance Conference 2011. All mistakes remain our own.


Address for correspondence: Carolyn Wirth, School of Economics and Finance, Massey University, Private Bag 11–222, Palmerston North 4442, New Zealand. e-mail: C.G.Wirth@massey.ac.nz

Abstract

This study tests the proposal that by undertaking voluntary capital expenditures that are subject to lengthy environmental regulatory delays, listed companies can gain a competitive advantage. The stock market is found to react positively to new capital expenditure announcements when projects are expected to experience long delays in obtaining environmental regulatory approval. Two sources of potential competitive advantage are firm learning and first mover advantages. Lengthy delays in regulatory processes and high compliance costs incurred for environmentally-sensitive projects may allow firms opportunities to develop specialised capabilities and/or to deter industry competitors and new entrants, resulting in greater expected project NPVs. The findings also underscore the importance of non-financial environmental information to investors in their assessment of firm value.

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