Resource consent delays ‘increase stock market value’

Monday, October 10, 2011
Resource consent delays ‘increase stock market value’

Research from Massey University suggests New Zealand’s often lengthy resource consent process can give publically-listed firms a strategic advantage that makes them more valuable on the stock market.

Carolyn Wirth, a senior lecturer in finance, studied the impact of expected environmental regulatory delay on capital expenditure announcements. She found companies that expect longer regulatory delays achieve higher than expected returns.

Her research, using data from 1992 to 2007, of 55 firms (including energy, healthcare, consumer goods and services), shows the longer the expected delay in resource consent approval, the higher the abnormal return can be –representing a rise in the market value of the company. These findings held after controlling for a variety of factors including firm size, project size and nature of the project.

For an average firm undertaking a ‘long time to consent’ project the net benefit is estimated to be in the range of $18 million to $23.4 million dollars at 2007 prices.

Ms Wirth says her findings suggest firms may benefit from early mover advantages, increased reputational benefits and superior environmental management systems, which may inhibit industry competitors. “There has been a lot of negative publicity about compliance costs due to delays in resource consent processes as the longer the delays, the more costly it is for firms,” she says. “I wanted to look at the evidence to see the actual economic impact of expected compliance costs on firms.”

Ms Wirth says the research, carried out as part of her PhD, concludes that firms initiating projects with higher resource consent compliance costs can create an advantage that makes them more valuable on the stock market.

“There are a variety of ways that delays might help a firm. They may learn how to cope better with the red tape and manage environmental risk, she says. “There is also likely to be a first mover advantage because, for example, there are only so many windfarms you can put on those hills and only so many excellent strategic locations for your retirement village. You may gain a benefit relative to your competitors if you get in first, because other locations may not be as advantageous.

“Also the delays can be a disincentive to new entrants. Often the project costs are irreversible so you want to be pretty confident before you go into it that it is going to be successful. I’m not suggesting that long delays for resource consent processes are good for the business community as a whole, but my research shows there can be advantages to some firms.”

Ms Wirth, who lectures on the Manawatu campus, will graduate with her PhD – Capital Market Implications of Resource Consent Information in New Zealand Listed Company Announcements – next month. Her paper The economic impact of capital expenditures: Environmental regulatory delay as a source of strategic advantage was co-authored by Professor Martin Young and Dr Jing Chi, both from Massey.

ENDS

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