Environmental Activism, Endogenous Risk, and Stock Prices

We consider three activist strategies, Exit, Boycott, and Voice, and examine how they can induce a value-maximizing manager to take action to eliminate the negative externality caused by the firm’s brown technology. We show that a sufficiently large number of activists are needed to have a large enough adverse impact on the polluting (brown) firm’s share price to induce the brown firm to become green at a cost. When the number of activists is in an intermediate range, the price of the brown firm’s shares will be depressed relative to the price of the green firm’s shares, but the effect will not be large enough to induce the brown firm’s manager to adopt the green technology when available. If the number of activists is small, there will be no impact on share prices. We find that divesting the brown firm’s shares (Exit) is less effective than boycotting the brown firm’s goods as it requires a larger number of activists. The effectiveness of engaging in a proxy vote (Voice) depends on the relative size of the brown firm in the economy. When a sufficiently high emissions tax is imposed through legislative action, the brown firm’s manager will adopt the green technology whenever it is available, leading to the socially optimal outcome.