The impact of European environmental policies on equity markets

: an econometric analysis

Abstract

This thesis investigates the impact of European environmental policies on equity markets, utilizing an event study methodology complemented by regression analysis to measure market reactions to policy announcements. Specifically, it examines whether such announcements generate abnormal stock returns and how these returns vary based on firm characteristics, such as environmental exposure and environmental performance. The dataset comprises European publicly traded firms from 2010 to 2023, focusing on the major EU policy initiatives such as the Paris Climate Agreement and the European Green Deal. The findings indicate that the events generally lead to significant abnormal returns, highlighting the market’s sensitivity to regulatory changes. The results also show that firms with low emissions typically experience superior returns around the event date compared to high-emission firms, driven by their lower transition risks. Furthermore, firms with strong environmental management practices experience inferior returns around the event date compared to firms with weak practices. This counterintuitive result is attributable to the immediate compliance costs incurred by environmentally proactive companies, which negatively impact their short-term financial performance. However, over the long term, lagging firms may face greater challenges and experience the opposite effect. Additionally, the study reveals sector-specific variations in short-term systematic risk following policy announcements, with high-impact sectors like industrials showing greater volatility. Overall, the research contributes to the ongoing debate on the economic implications of environmental regulation, providing valuable insights for policymakers, investors, and corporations alike.

Date of Award	26 Jun 2024
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	José D. Garcia Revelo (Supervisor)