Pollution and capital markets in developing countries

It is said that firms in developing countries do not have incentives to inv est in pollution control because of weak implementation of environmental re gulations. This argument assumes that the regulator is the only agent that can create incentives for pollution control, and ignores that capital marke ts, if properly informed, may provide the appropriate financial and reputat ional incentives. We show that capital markets in Argentina, Chile, Mexico, and the Philippines do react to announcements of environmental events, suc h as those of superior environmental performance or citizens' complaints. A policy implication is that environmental regulators in developing countrie s may explicitly harness those market forces by introducing structured prog rams of information release pertaining to firms' environmental performance: public disclosure mechanisms in developing countries may he a useful model to consider given limited government enforcement resources. (C) 2001 Acade mic Press.