King, Andrew, and Michael Lenox. "Exploring the Locus of Profitable Pollution Reduction," Management Science. Vol. 48 (2), 2002.

Studies the financial impact of environmental initiatives. Aware of Russo & Fouts' (1997) finding that environmental strengths were associated with positive financial performance, the authors pursue the question further by dividing environmental programs into those focused on prevention and those focused on waste treatment.

Theoretical discussion asks [if Russo & Fouts are right] "why might managers miss opportunities for profitable pollution reduction?" The authors explain that "theories of information from economics help provide an explanation...lacking information on the locus of profit opportunities, managers' prior expectations may determine the location and intensity of search." They note that research in quality management has shown that "managers often over use rework departments to fix quality problems at the end of the line and under use total quality management," and suggest an analogy with investment in waste reduction versus pollution prevention projects.

The study evaluates 646 U.S. manufacturing firms for the 1991-1996 time period. Using Tobin's Q as a measure of financial performance, and controlling for firm size, growth, R&D intensity, and financial leverage, finds that waste prevention is strongly associated with good financial performance (p<0.01). All models show significant F stats (p<0.001), but r2s are below 20%.