New research shows external effects significantly influence market values

New research shows external effects
significantly influence market values

Is sustainability relevant for stock prices? New research by finance professor Dr. Marco Wilkens in cooperation with Effectual indicates that external effects play a measurable role in equity valuation. The study shows that a company’s market value reflects its external effects in a statistically significant and economically meaningful way, but still far from completely. External effects are uncompensated costs and benefits to society and the environment resulting from a company’s activities.

Using a global sample of more than 7,000 firms from Effectual’s dataset, the analysis finds that, on average, 10 to 20% of the present value of a company’s external effects are priced into its market valuation. Since these effects are often substantial and predominantly negative, they can result in meaningful valuation discounts. “The market expects that external effects will affect future cash flows via consumer behaviour or policy interventions, and are therefore partially internalized. However, these effects are far from being fully priced in,” explained Marco Wilkens when presenting the study at the Effectual Bar Talks in Munich.

For portfolio management, this implies that as internalization progresses, stock prices will increasingly reflect these effects, benefiting assets and portfolios with low negative or even positive external effects.

For an executive summary of the research, please contact info@effctl.com.