Working Paper Proceedings

Engineering Project Organizatons Conference

Estes Park, Colorado
August 9-11, 2011
Proceedings Editor
T. Michael Toole, Bucknell University
Copyright belongs to the authors. All rights reserved. Please contact authors for citaton details.
Green to Gold? An Empirical Analysis in the AEC
Industry
Authored by
Yujie Lu and Qingbin Cui
Proceedings EPOC 2011 Conference
GREEN TO GOLD? AN EMPIRICAL ANALYSIS IN THE AEC INDUSTRY
Yujie Lu,
1
and Qingbin Cui
2

ABSTRACT
Green projects continue to expand rapidly as a result of growing concerns about environment and
energy efficiency. According to the Engineering News Record (ENR), green retrofits and new
green building construction will probably represent 20%-30% of the non-residential market by
value in the next five years. At the same time, green elements are increasingly incorporated into
infrastructure planning, design, construction, and maintenance. Along with the growth of green
market, going green in the AEC industry not only demonstrates corporate social responsibility,
but also can yield significant economic benefits. However, the actual cost and benefits of going
green have not yet been thoroughly measured. The issue is even more pressing under the current
economic recession when many companies are forced to cut costs and close unprofitable
operations. This paper provides an empirical analysis of the financial performance of green and
conventional companies. The companies are selected from the ENR top contractor and design
firm list, Dow J ones Sustainability Indexes (DJ SI) series, and Newsweek 500 green U.S.
companies . The DuPont method and Economic Value Added analysis were used to evaluate the
performance of green and conventional companies based on several aspects: profitability,
financing, activity, tax, and operation. A comparison analysis of the 12 pairs of conventional and
green firms shows a significant difference in return on equity (17.44% vs 8.72%) and economic
value added (1.08% vs -0.743%) between green and conventional AEC firms. The results of the
analysis also raise an important question of how one can determine a green contractor, and what
are the green strategies for construction firms.
KEYWORDS: Green Firm, Business Performance, Dupont Analysis, Economic Value Added,
Competitive Advantage

INTRODUTION
The incorporation of green principles into project design and operation processes has
been profoundly changing the construction industry. This change causes an increasing interest in
pursuing green project certification, such as Leadership in Energy & Environmental Design
(LEED) certifications, and green organization certification, such as Engineering News-Record
(ENR) Top 100 Green Contractors or Green Design Firms. While growing green practices have
been observed throughout the entire industry, little is known regarding the link between going
green and corporate performance. The issue is even more pressing under the current economic
recession when many companies are forced to cut costs and close unprofitable operations.
Corporate financial performance can be measured for short term outcomes and long term
objectives. For instance, financial ratios including profit margin and return on equity are
generally calculated to evaluate a companys profitability during a certain period of time. If the

1
Research Assistant, University of Maryland, College Park, Maryland 20742, USA. Also PhD Candidate, School of
Economics and Management, Tongji University, Shanghai 200092, China;. Email: lyj0415@gmail.com
2
..Assistant Professor, Department of Civil & Environmental Engineering, University of Maryland, Maryland 20742,
USA. Email: cui@umd.edu (Corresponding Author)
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Proceedings EPOC 2011 Conference
company is public traded, the price-to-earnings ratio of its stock represents the companys long-
term earnings growth. The higher the price-to-earnings ratio, the better the long-term earnings
performance. This paper aims to examine the potential performance difference caused by going
green in the Architecture/Engineering/Construction (AEC) industry and furthermore investigate
the underlying reasons if there is performance difference. Despite of increasing research interests
in green organizations in the AEC industry, little knowledge is available regarding whether and
how going green yield better financial and economic performance for AEC firms.
This paper provides an empirical analysis of organizational performance associated with
going green. 12 pairs of AEC firms were and analyzed and compared to examine the short term
financial performance and long term economic profit. The analysis follows a general process for
performance analysis: (1) a set of valid companies are selected from construction company pools
based on the pre-defined criteria; (2) financial and related data is collected from various
database; (3) a pilot analysis is used to check the data effectiveness and eliminate outliers; (4)
extensive statistical analysis of performance indicators including DuPond, EVA, and market
price; (5) Analysis results are identified and used to redefine competitive advantages for AEC
firms.

EXPERIMENTAL DESIGN
Organizational Performance Evaluation
The objective of this study is to testify the economic returns and financial performance
for green investment in the construction and engineering industry. Inevitably, the return means
variously to different project participants and involved shareholders and can be measured in
different ways. In order to benchmark all the benefits by going green, three performance
evaluation methods are used: 1) DuPont analysis that addresses the short financial performance;
2) Economic Value Added (EVA) that estimates the economic profit created in excess of the
required return of the company's shareholders; and 3) corporate market value that represents
market performance to interested stakeholders.
DuPont Analysis
DuPont analysis is to test a companys financial performance based on its Return on
Equity (ROE) and associated breaking-down elements. The DuPont analysis of three breaking-
down elements is shown in Figure 1, where each of those components represents a particular
financial performance indicator to the company. For example, part 1 stands for the return on the
shareholders investment, part 2 for companys profit margin, 3 for the asset turnover, 4 for the
leverage ratio. The components of part 2 can be further broken down into three new parts and
extend the DuPont analysis into five elements, where part 5 indicates the companys tax burden,
part 6 for interest burden, and part 7 for the operating profit margin. The measurements used in
DuPont analysis are all publicly available data obtained from companys annual reports and
financial statements. By comparing the DuPont analytical results with competitors in the same
industries, the companys source of superior or inferior financial returns can be identified.
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Proceedings EPOC 2011 Conference
)% (
Revenue
profit Net
)% (
Equity
profit Net
)% (
Equity
Asset
)% (
Asset
Revenue
)% (
EBT
profit Net
)% (
EBIT
EBT
)% (
Revenue
EBIT

Figure 1 DuPont Analysis Framework

Economic Value Added
Economic Value Added (EVA) is an estimate of a firm's economic profit created in
excess of the required return of the company's shareholders. It was firstly developed and used by
J oel Stern in 1960s and now is widely employed as a financial evaluation tool by companies
worldwide. Using EVA has become an increasingly popular since it provides a better
understanding of companys generated earnings compared to the amount of investment. This
comparison is especially important in current economic recessions when construction companies
are seeking ways to conserve capital and operate more efficiently. The EVA result is calculated
by using companys Net Operating Profit After Taxes (NOPAT) subtracted a theoretical charge
for the cost of capital used in the business. It can also expressed by multiplying the differences
between the Return of Capital (ROC) and the Weighted Average Cost of Capital (WACC) by the
invested capital (K). The WACC indicates a ratio of firms cost of capital in which each asset is
proportionately weighted. To eliminate the impacts of various sizes of companies, a ratio of
EVA-to-revenues, also called the EVA margin, is used to compare various companies. All
notations used in above formulas and data sources required to calculation are listed in the Table
3.
EIA = N0PAT -wACC - K
EIA = (R0C -wACC) - K
WACC =

(1)
c
- (Ev) + R R
d
- (1 -t) - (Bv)
EIA Horgin = (
EIA
totol rc:cnuc
(2)
(3)
)%
(4)







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Proceedings EPOC 2011 Conference
Table 1 Variables and Data collection for EVA calculation
Variables Data Sources
Total Revenue Capital Iq Database
ROC, Return On Capital Capital Iq Database
K, Invested Capital Capital Iq Database
R
]
R
M
R
M
- R
]
, Risk free Rate Us Treasury Constant Maturity -10 Year ( Average
Daily Bond Rate), From Federal Reserve In St.
Louise
, return of stock market
, Risk premium Aamodaran Online, Nyu
Http://Pages.Stern.Nyu.Edu/~Adamodar/
, firms sensitivity to the stock
market risk
Capital IQ Database
E, firms total equity value Capital IQ Database
D, firms total debt value Capital IQ Database
V=E+D, firms total value Capital IQ Database
t, corporate tax tate Capital IQ Database
o
o =
_
- I , wbcrc x

= log(
P
i
P
(x
i
-x )
2 N
i=1
N-1
, annual volatility of stock prices
daily logarithmic returns
i-1
)
R
c
R
c
= R
]
+ - (R
M
- R
]
)
R
d
R
d
= R
]
+ uefaul

Calculation of stock historical data from Yahoo
finance (assume T=256 days in a year, N=20 days in
a volatility period, P

is the stock daily price. If this

stock is not open or traded in parts of the year, then
only trading numbers are concluded.)
, Cost Of Equity By calculation,

, Cost Of Debt
t spieau
By calculation,
default spread Linear interpolation calculation of o (see Table 4)
WACC, weighted average cost of
capital
By calculation

Stock market valuation indicators
Stock market evaluation is another method of calculating theoretical values of companies
and their stocks in a publicly traded market. It can be also expressed as the market recognition of
this company as well as the prediction of companys potential market price movement. Two
fundamental criteria are used to justify the stock market prices including Price to Earnings (P/E)
ratio and EV to EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization). Since
the evaluation relies heavily on the expected growing rate of a company, the revenue growth rate
of each company is also provided.
P/E ratio
Price-Earning (P/E) ratio is calculated as companys current share price compared to its
per-share earnings in formula (7). Where, S is stock price, accessed from the stock market on the
last trading day of each year. EPS, Earnings per Share, is the amount of earnings per average
outstanding shares of a companys stock, which is decided by companys net income (I) over its
weighted average common shares (X). P/E ratio is the most common valuation technique used
for stock valuation and provides a fundamental judgment of enterprise total values.
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Proceedings EPOC 2011 Conference
P
E
=
S
EPS
=
S
(
I
X
)

(5)
EV/EBITDA
EV/EBITDA is another critical valuation multiple that is commonly used in corporate
valuation. It is calculated by dividing Enterprise Value (EV) over EBITDA (Earnings Before
Interest, Tax, Depreciation, and Amortization). This evaluation ratio encompasses the
information of the entire firm values and operations without potentially distorting effects of
individual policies like taxation and depreciation. And the main difference between EV/EBITDA
and P/E ratio is EV/EBITDA is neutral to a companys capital structure and allows more fair
comparison.
Traffic Growth Rate
Revenue growth rate is the percent change in a companys total revenue between two
equivalent fiscal periods. In this study, annualized growth rate of a companys total revenue
between two consecutive years is analyzed. Ideally, it is used to measure the expanding scale of a
companys business growth and also provides an important factor to determine the expected
future earnings growth. In total, eleven evaluating measurements are analyzed to indicate various
financial performances in a company. All used metrics and brief descriptions are shown below.

Table 2 Financial indicators used in this study
Performance
Indicators
Measuring
indicators
Short description Factors
Return Return on Equity net profits from the shareholders equity F1
Profitability profit margin net profit as a percentage of total revenues
(both operation and non-operation
phases)
F2
Operating profit
margin
Earnings Before Interest and Taxes
(EBIT) as a percentage of total revenues
(only operation phases)
F3
Financing
activities
Tax burden Tax as a proportion of net profits F4
Interest burden Interest as a proportion of EBIT F5
Financial
leverage
total assets by shareholders equity F6
Operating
Efficiency
Asset turnover total revenues by total assets F7
Corporate value EVA margin EVA value over total revenue, EVA
equals to created profits minus the
invested capital cost
F8
Enterprise market
valuation
P/E Stock price by per-share earnings F9
EV/EBITDA Total enterprise value by over Earnings
Before Interest, Tax, Depreciation, and
Amortization (EBITDA)
F10
Growth Revenue growth Annualized total revenue increase or
decrease
F11

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Proceedings EPOC 2011 Conference
Data Collection
The scope of this research focuses on the Architecture/Engineering/Construction (AEC)
companies and their financial performance from 2007 to 2009. In order to acquire enough data
for further statistical analysis, we only select those publicly traded companies listed in major
U.S. stock markets, including the New York Stock Exchange (NYSE), American Stock
Exchange (AMEX), and NASDAQ Stock Market (NASDAQ), as well as appeared in the North
American Industry Classification System (NAICS) code within the category of Construction &
Design Services. In addition, three green lists are referred to as sources to distinguish the green
companies, such as the Engineering News-Record (ENR) Top 100 Green Contractors (2007-
2010), Top 100 Green Design Firms (2008-2010), and Newsweek Green U.S. Companies
Rankings (Newsweek 2010). Finally, there are 11 green firms and 11 conventional firms selected
as portfolio companies. The step-by-step selection process is shown in Figure 2, and the list of
companies is presented in Table 3.


Figure 2 Sample selection process
















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Proceedings EPOC 2011 Conference
Table 3: List of Green and Conventional Companies

Public Market And
Ticker
Green criteria Name Of Green Companies
[NYSE: KBR]
ENR TOP 100 Green
contractors
KBR, Inc.
[NYSE: TPC]
ENR TOP 100 Green
contractors
Tutor Perini Corporation
[NASDAQ (GM):
PRIM]
ENR TOP 100 Green
contractors
Primoris Services Corporation
[NYSE: URS]
ENR Top 100 green design
firms
URS Corporation
AECOM Technology
Corporation
[NYSE: ACM]
ENR Top 100 green design
firms
[NASDAQ (GS):
TTEK]
ENR Top 100 green design
firms
Tetra Tech, Inc.
[NYSE: FLR]
Newsweek, Green 500 U.S.
Companies
Fluor Corporation
[NYSE: J EC]
Newsweek, Green 500 U.S.
Companies
J acobs Engineering Group Inc.
[NYSE: MDR]
Newsweek, Green 500 U.S.
Companies
McDermott International, Inc.
[NYSE: EME]
Newsweek, Green 500 U.S.
Companies
EMCOR Group, Inc.
[NYSE: SHAW]
Newsweek, Green 500 U.S.
Companies
The Shaw Group Inc.

Name Of Conditional
Companies (CC)
Public Market And
Ticker
Industry
Granite Construction
Incorporated
[NYSE: GVA] ENR TOP 400 contractors
Pike Electric Corporation [NYSE: PIKE] ENR TOP 400 contractors
Hill International, Inc. [NYSE: HIL] ENR TOP 400 contractors
TRC Companies, Inc. [NYSE: TRR] ENR TOP 400 contractors
[NASDAQ (GS):
LAYN]
ENR TOP 400 contractors Layne Christensen Company
[NASDAQ (GS):
MTRX]
ENR TOP 400 contractors Matrix Service Company
Sterling Construction
Company, Inc.
[NASDAQ (GS):
STRL]
ENR TOP 400 contractors
Orion Marine Group, Inc. [NYSE: ORN] ENR TOP 400 contractors
Great Lakes Dredge & Dock
Corporation
[NASDAQ (GS):
GLDD]
ENR TOP 400 contractors
Willbros Group Inc. (NYSE:WG) ENR TOP 400 contractors
Quanta Services, Inc. [NYSE: PWR] ENR TOP 400 contractors




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Proceedings EPOC 2011 Conference
Multiple financial databases have been accessed with licensed users during the data
collecting and processing, including Hoovers database, Capital IQ database, U.S. Securities and
Exchange Commission (SEC), Google Finance and Yahoo Finance.
Data Analysis
After calculating all related financial ratios for all targeted companies, two types of
statistical techniques are used to compare the mean value of multiple financial metrics between
the green and conventional firms. Based on different sample size and properties of dataset, a T-
test is been employed for large size and normal distribution datasets; a Mann-Whitney test
equipped with Monte-Carlo simulation and Fisher Exact test is employed for small size and non-
parameter datasets. The t-test, also known as the student test, is a commonly used technique to
compare means of different groups. Using t-test needs two requirements when 1) the population
is normally distributed and 2) two group data are independent and random collected from the
population
The t-test has a variety of calculating approaches based on the equality of sample sizes
and variances. Specifically, three types of scenarios exist including equal sample sizes and equal
variance, unequal sample sizes and equal variance, and unequal sample sizes and unequal
variance. In this study, different sample sizes apply since some data points might be identified as
outliers and removed from the statistical analysis for 11 pairs companies. To assess the equality
of variances, the Levene's Test is used which tests null hypothesis that the population variances
are equal, also called as the homogeneity of variance. If the resulting significant value is larger
than 0.05, then the null hypnosis is accepted. If the resulting significant value is less than 0.05,
the null hypothesis of equal variance is rejected and it is concluded that there exist difference
between variances in the population. The result of Levenes test is shown in the final calculation
tables.
Small Sample and Optimum Assessment
A fundamental problem in statistical inference is summarizing observed data in terms of
a p value and judging whether to accept or reject the null hypnosis conclusion. However, when
the sample sizes are small, typically less than 10, the p value may fail to produce reliable results.
This is because the data fail to meet the underlying assumptions necessary for reliable results
using the standard asymptotic method. In such a situation, a non-parameter test enhanced by
either Fishers Exact test and the Monte-Carlo simulation is used to acquire the reliable results.
The Mann-Whitney test, also known as the MannWhitneyWilcoxon (MWW) or
Wilcoxon rank-sum test, is one of the most popular non-parametric two-sample tests developed
by Frank Wilcoxon in 1945. It is a non-parametric significant test similar to the T-test, but
commonly used when the targeted variables are not assumed normally distributed or are small
sample numbers. This method calculates the value of U by ranking and summing all of the
observations in both groups in accordance with the following rules:
Both Fishers Exact test and Monte-Carlo simulation provide powerful means to small
sample test and apply to a very wide class of hypothesis test. Fishers Exact test is a method used
to make reliable inferences by computing a significance level (p value) for different hypotheses
based on the exact distribution of the test data rather than the asymptotic method normally used
in the non-parametric tests (Mehta and Patel 2010). Using exact test to calculate non-parametric
test of two independent samples (the Mann-Whitney test above) has already been statistically
proven and used in other research fields.
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Proceedings EPOC 2011 Conference
The Monte-Carlo simulation is a repeated sampling method used to generate abundant
random samples based on existing data properties in order to get more accurate statistical results.
This method is most suited to calculation by computer programming because of its highly
repeated computation. In this study, the simulation time M=10000, and confidence level a=99%.
The Monte Carlo estimate is extremely close to the exact value.
Professional statistical programming software, SPSS 17.0, is used to run the final result
after data collection and preparation. To remove the outliers from the data, the SPSS boxplot is
used and the extreme values are identified. Therefore, the final result is only calculated on the
basis of validated data and use three scales of significant levels in the table below.

p value significant levels
0<p<0.01 Highly significant
0.01<p<0.05 significant
p>0.05 Not significant

RESULT AND DISCUSSION
Based on the above mentioned performance metrics and available data of samples for
green and conventional contractors, statistical analysis during the 2007-2009 are calculated and
summarized in the follows. Table 1depicts the descriptive statistics for all performance metrics
from F1 to F11, where green companies are indicated as firm type 1 and conventional
companies are 0. The T-test to compare mean value of each metric of green and conventional
companies is shown in Table 4. To illustrate the variance for two different groups, the error bar
within 95% of Confidence Interval (CI) of mean value of all performance metrics are shown in
Figure 3. The results are structured into seven parts as economic returns, profitability, financing
activities, operating efficiency, long term corporate value, enterprise market valuation, and
corporate growth capability.

Figure 4 Error bars for various performance metrics (95% Confidence Intervals)

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Proceedings EPOC 2011 Conference
Table 4 Statistical Analysis of DuPont Model and EVA


Economic Returns
Return On Equity (ROE) is a percentage which measures a corporates return of
investment by generating profits from every unit of shareholders equity. Generally, it can be
regarded as reflecting a firms efficiency at using investment funds to generate earnings growth
and is best used to compare companies in the same industry.
For the selected portfolio, the overall average ROE (F1) during 2007 to 2009 is equal to
13.0%. The mean value of ROE on green firms yields 17.4%, which is significantly greater than
conventional firms with mean value of 8.2% (p value=0.003). This means that green firms with a
higher ROE rate drives the company a high growth rate.
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Proceedings EPOC 2011 Conference

Figure 5 the ROE for different groups
20.6%
18.8%
13.0%
14.7%
15.2%
9.3%
8.3%
11.2%
5.5%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2007 2008 2009
Green
Portfolio
Conventional
P=0.003
P=0.010
In detail, the ROE perform with a large variety year by year since it has large been
impacted by changing microeconomic trends and market performance. The performance of 2007
can be regard as the Business As Usual (BAU) scenario since the economic crisis happened in
the end of 2007 and played limited impact on this year. The performance of 2008 is considered
as the most difficult times during consecutive three years and certain amounts of data points
existed as large variances. The performance of 2009 is a special time when companies were
gradually recovering from the crisis and back to the normal business.
In 2009, the green firms yield average ROE of 13.0% that is over two times higher than
conventional firms with 5.5% (p value of 0.002). This high indicates that green firms have better
capability to revive from the crisis and to face the new market. However, in the middle of crisis
of 2008, no significant differences (p>0.1) exist between green and conventional firms primarily
because some companies overreact to the irregular market and delivered unexpected
performances. This also indicates that the two types of companies behave similarly during the
crisis. In 2007, at significant level of 0.1, the green firms statistically outperform over two times
than conventional ones with ROE of 20.6% and 8.3% respectively, which means the BAU
scenario still favor to the green firms.
Profitability
Companys profitability can be shown by two ratios, profit margin (F2) and operating
profit margin (F3). Profit margin (F2) is a ratio of profitability which calculates companys net
profit as a percentage of total revenues. It measures the actually amount of every dollar of sales
can be kept in earnings. A higher profit margin indicates a more profitable company that has
better control over its operating cost as well as financial cost and taxes compared to its
competitors. Statistic shows there is no significant difference between the green companies and
conventional companies during recent three years (p value=0.874). This result suggests that
green companies can keep the similar profitability with convention companies after considering
both operation and financial activities, although they might experience the disadvantage in
creating operating profits. Operating profit margin (F3) is an indicator of a companys
profitability, calculated as Earnings Before Interest and Taxes (EBIT) over than total revenues. It
is expressed as an efficiency of a company controlling the costs and expenses associated with
business operations. The higher the operating margin ratio, the better operating and pricing
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Proceedings EPOC 2011 Conference
efficiency as well as the successful cost controlling the company owns. Deviate from the profit
margin that is the return achieved from standard operations as well as non-operating costs
(considering both interest payment and income taxes), the operating profit margin only reflects
the operational profitability and expenses and therefore the number is greater than the profit
margin for the same company.
During three years, under the 10% of significant level (p=0.062), statistical analysis
shows that green companies (5.3%) have lower operating profit capability than conventional
companies (6.5%). This result indicates that the green companies do have a relative disadvantage
in cost burden than conventional companies and cause a weak capability to generate operating
profits. However, interestingly, the differences between two groups are changing and generally
narrowing down during these years. In 2007, conventional company leads the advantage than
green companies by 7.0% v.s. 4.9%; in 2008, the advantage is reduced to 6.8% v.s. 5.3%; in
2009, the difference is not even significant (p=0.9) and appears as 5.5% v.s. 5.6%. The
conclusion can be drawn that the going green does raise companys cost burden and lower
operating profit for construction companies at initial stage, but this impact will be gradually
reduced and nearly show no difference in the cost structure in a longer time.
Financing Activities
In this study, corporate financial activities are measured by three ratios as tax burden,
interest burden and financial leverage. Tax burden (F4) is expressed by a percentage ratio of net
profit divided by Earnings Before Taxes (EBT). Since the net profit is equal to EBT minus
imposed taxes, therefore the ratio is equal to 100% when no tax is imposed. When companies
pay heavy taxes, this ratio is much lower than 100%; when companies receive taxes incentives or
rebates from the government, this ratio is greater than 100%. During three years, the average tax
burden for two types of companies are similarly equal to 65% (p=0.9), which means going green
does not bring any visible evidence of policy-based tax incentives or benefits.
Interest burden (F5) is another ratio to measure the corporate financial efficiency. It uses
a percentage of EBT (including unusual items) over EBIT and equal to 100% if no interest
happens. The lower ratio less than 100% means there is an interest expense paid, and the higher
ratio over than 100% means an interest income gained. During recent three years, green
companies significantly outperform than conventional companies (100.1% v.s. 85.2%) with 0.09
of significant level. The result implies that going green could save companys interest payment
and may produce non-operating income instead of expense. The reason may come from the
green companys efficient financing activities or non-tangible assets benefits.
Financial leverage (F6) is a ratio calculated through dividing companys total assets by
shareholders equity. Since the total asset is the summation of equity and debt, this ratio
essentially measures the proportion of equity and debt the company is using to finance its assets.
Therefore a high leverage ratio indicates the companys better capability on debt financing, as
well as possible exposure of high risks. And a healthy leverage ratio for construction industry is
around 2:1. From 2007 to 2009, the green companies show a significant higher leverage ratio of
2.7 than conventional companies of 1.9 (p <=0.001), which means green companies can attract
more debt capitals based on the same amount of equity to drive the business operation. In other
aspect, the green companies borrowed utilized excess funds in high risk investments in order to
maximize returns. In three years periods, both two groups leverage values decreased 10~20%
possibly caused by reasons of economic downturn and higher lending rate, however, both groups
still showed high significances in leverage radios in each specific year (p<=0.05).
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Proceedings EPOC 2011 Conference
Operating Efficiency
To measure a firms efficiency at using its assets in generating revenue, the asset turnover
rate (F7) is used and calculated by dividing the total revenues by total assets. Asset turnover
represents the amount of revenues generated from every dollar of stakeholders assets. It also
indicates the companys pricing strategy and associated profit margin changes. Companies with
high asset turnover frequently tend to have low profit margin because of intense and competitive
pricing.
In the statistical result, three years average asset turnover of green companies was 1.87
and largely greater than conventional companies of 1.25 (p<=0.001). It means that, based on the
same amount of shareholders invested asset, green companies could generate 33% more on
revenues than conventional contractors because of more projects and workloads. This was also
evident from the Engineering News Record (ENR) green project records. ENR published the Top
100 green contractors list each year since 2007. In recent three years, the companys average
revenue generated from green projects raised dramatically over 100% growth, which largely
overruns the companys total revenue increase rate. (see Table 6)

Table 5 ENR green contractors revenues 2006-2008
Performance Metrics 2006 2007 2008
Average Green project revenues (million USD) 179.232 398.962 666.398
average Total revenues(million USD) 1152.7 1791.2 2236
Percentage of Green project revenues (percent) 15.55% 22.27% 29.80%
(Note: calculated from the ENR top green contractors list 2006-2008)

Long Term Corporate Value
EVA is an analytical performance tool to measure the corporate residual value based on
the classic financial theory and corporate evaluation principles. It recognizes that the company
does not create value until a threshold level of return is generated for its stakeholders.
Understanding EVA can help the management clarify the real corporate value created beyond all
financial obligations by only relying on one single performance number, which conveniently
summarizes all financial information including the balance sheet data, adjusted income statement
and stock market performance. Because the EVA calculation depends heavily on the invested
capital, the best use of EVA tends to be more accurate for analyzing asset intensive and
intangible industries, such as construction and engineering firms. To compare various sizes of
companies as size-neutral, the EVA margin is used by dividing companys EVA with its
revenue.
From the statistical result, the EVA margin (F8) of green contractors is significantly
(p=0.004) larger than conventional contractors (0.35% v.s. -1.43%). It means that green firms
created position economic profits after paying back all invested capital and stakeholders equity.
Averagely, generated profit is 0.35% of corporate total revenue. Although this number shows
relative smaller than five-year average EVA margin of 2.3% of S&P 500 (as of December 15,
2010). Green contractors still show a better overall profitability and productivity of their
business strategy spanning operating efficiency and asset management. However, for the
conventional contractors, the negative number implied that the conventional contractors actually
lose profit, 1.43% of its revenue, after considering the cost of invested capital. While maximizing
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EVA profits acts an important driver and analytical tool that is helping companies to measure of
successful corporate performance management, green contractors show more ability on
addressing the three-Ps- price, product and process..
Enterprise Stock Market Valuation
P/E ratio
The P/E ratio (F9) is an informative indicator and one of the most frequently used metrics
for equity valuation by considering the stock price. Typically, a higher P/E ratios means that
investors are paying more for each unit of net income than lower P/E ratio companies, which
also suggests that the high P/E company is expected an optimistic earnings growth in the future.
Historically, the average P/E ratio in the market has been around 15-20. For the construction
industry during 2007-2009, after removing outliers, the average P/E ratio for all 22 companies is
17.49.
The statistically result shows the show average P/E ratio of green companies is 16.5,
which is 11% less than the conventional contractors of 18.6 in spite of the lower level of
significance (p=0.381). Given the construction industry is mainly oriented in projects and
tangible assets, construction companies are typically evaluated both by competitive value in
itself and room for potential growth. Along with the green concept is becoming the ad hoc
business mainstream, it is implies that green companies are undervalued in the current market
situations. The underrated value is becoming more obviously in the recent year of 2009, green
companies show 26.5% of lower P/E than the conventional contractors by 12.9 v.s. 17.6
(p=0.113). Possible reasons of this underestimated is the market hasnt realized the
competitiveness and extra value brought by the going green strategy.
EV/EBITDA
The historical EV/EBITDA (F10) ratio in the stock market ranges from 6~8. A high ratio
indicates that a company might be overvalued than its true value, and vice versa. The statistic
result show there is no significant different between two groups (green 7.79 v.s. conventional
8.08), which indicates that going green does not bring extra value to the entire company value
without considering the capital structure changes.
Growth rate
The revenue growth rate (F11) of green and conventional groups from 2007 to 2009 is
shown in Figure 6. Generally, the green groups (12.4%) grow faster than conventional firms
(6.4%) in generating revenues although the statistic result is not highly significant (p=0.185).
The result indicates that the green companies show a stronger growing capability and will more
attractive to future investors. The green firms always show the leadership of growth over
conventional firms for each single year from 2007 to 2009 despite of the economic recession
impacts.
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Figure 6 growth rate of green firms and conventional firms
10.00%
5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
2007 2008 2009
TotalRevenues,1YrGrowth%
Greengroup
profolio
Conventionalgroup

CONCLUSION
To conclude, this paper addresses four hypotheses on the linkages between going green
and corporate financial performance in AEC industry.
Does going green yield better financial performance?
Yes. Going green makes the company generating the higher equity returns to their
shareholders than conventional contractors (H1), and having more robustness to resist the
unexpected changes and even quickly reviving from the crisis. Before investing of green projects
or products, investors are often skeptical about whether going green will bring enough benefits
when up-front expense is intensive larger than regular projects. This concern also transfers into a
major barrier for most of companies when they consider going green or initiate the green
strategy. After all, the construction companies are profit driven and essentially rely on the
projects turnover. This study indicates there is a positive relationship about going green and
achieving a higher return on shareholders equity, which help to release those concerns for the
potential entrants of this green market.
H2: How does going green provide competitive advantage?
Green firms generate profits that exceed the conventional competitors due to it possesses
of a competitive advantage over its rivals. Michael Porters identified three generic approaches
of competitive advantage focus on differentiation advantage, cost leadership, and find the
niche focus (Porter 1985). The previous discussion can also be interpreted and related to three
competitive advantages for the green firms.
The first reason is efficient asset management (H2), which suggests that green companies
have a higher number of undertaken projects and fast turnover rate because of the green project
differentiation and market favorites. Its evident that going green, as a differentiation strategy,
win more projects biding and occupy a higher percentage of the construction market share than
conventional projects. Meanwhile, the green projects are more likely to be sold or rent at the
same premium. Therefore, greening the asset could create a substantial growth of sale comparing
to the conventional asset settings due to its market differentiation advantage. The second reason
is proficient financing activity (H3), which minimizes the interest cost of lent capital and
therefore activates the cost leadership advantages. Actually, the green companies not only lower
their financing cost, but also receive non-tangible incomes from the non-operating process,
which is another evidence of competitive advantage of finding the specific market niche.
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Proceedings EPOC 2011 Conference
Where, the green companies target a unique position in a specific segment and create values. The
third reason is attracting more capital investment to expand the business (H4), which enlarges the
production scale of green companies and further lower the financial cost structure. Another
explanatory reason is construction industry requires intensive capital for the equipment, labor,
and overhead expenses, therefore the capability of easily financing is more suitable to the
industry characteristics and help to benefit green companies.
H3: Does going green create long term value?
Yes. Green behaviors can create abundant values to the entire corporation from two
aspects (H5). Direct reason is that going green can earn more positive economic profits (H6) to a
company even considering all costs of invested capital. Secondary consideration indicates that
green firms are currently undervalued in the stock market evaluation. This is because green
companies have a stronger growing capability and consistent trend (H7) as well as a comparative
lower market evaluation in present situation (H8).
H4: What is the practical implication?)
While going green bring benefits to shareholders and add corporate long term value, it is
also face three challenges and risks. First, going green is verified to increase the companys
operating cost burden in the short term (C3). At the initial stage, such burden will cause lower
operating profits although the green company still have an unchanged profitability by
considering the capital structure and financing activities. In a long term, such impact of cost
burden will be diminished to a negligible level. Therefore, adaption and limitation of this cost
impacts in a short time becomes another challenge. Second, green companies are facing the
higher financial risk while they attract more capitals to drive the business operation (C1). The
effective risk management approaches should be equipped to mitigate those financial risks.
Third, it is evidence that green companies have not received extra policy-based tax incentives
which can obviously benefit their net profits or the financial conditions (C2). A successful green
company must require a creative and innovative capability generated from itself to compete in
such an intensive construction market.

Figure 7 Relationships of going green and corporate performance

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17

The relationship of going green and associated benefits and challenges are concluded in
the following Figure 7. The right hand side is associated benefits and competitive advantages,
and the left hand side is related challenges. The solid arrow line indicates the significantly
statistical relationship and the dash arrow line is the weakly significant relationship.
The analysis presented in this study provides direct evidence of a strong and positive
relationship between going green and corporate financial performance in the AEC industry. The
historical statistical result could also be an implication to practitioners who are concerned about
going green effects in the future.

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