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Renewable Energy Stocks’ Performance and Climate Risk: An Empirical Analysis

Author

Listed:
  • Lingyu Li

    (Department of Information Systems, Virginia Commonwealth University, Richmond, VA 23284, USA)

  • Xianrong Zheng

    (Information Technology & Decision Sciences Department, Old Dominion University, Norfolk, VA 23529, USA)

  • Shuxi Wang

    (Department of Artificial Intelligence, University of International Business and Economics, Beijing 100029, China)

Abstract

This article studies the relationship between renewable energy stocks’ performance and climate risk. It shows that publicly held renewable energy stocks underperform as a reaction to climate policy information releases, modeled by feed-in tariff (FIT) legislation announcements. The study examined stock price behaviors 2 days before and 30 days after FIT policy announcements. The stock sample used in the study has 3702 firm-day combinations, which included 180 cleantech firms and 32 events from 2007 to 2017. Based on the residual analysis of the sample’s abnormal return, it indicated that the FIT announcements are associated with significant declines in returns. The cumulative abnormal return until Day 18 was a significant −0.83%, while the average abnormal return on the day was −0.16% at normal levels. The study partially excluded the likelihood of a transitory result by varying the measurement horizon. It also adopted both the market model and the Fama–French three-factor models to rule out model misspecification when estimating abnormal returns and thus increased the robustness. In fact, the results were stable to changes in estimating the model’s specifications. In addition, the study compared the portfolio’s performance with mimicking portfolios in terms of size, book-to-market equity (BE/ME), and the firms’ geographic location. It demonstrated that the documented anomaly of the portfolio of renewable energy companies is robust.

Suggested Citation

  • Lingyu Li & Xianrong Zheng & Shuxi Wang, 2024. "Renewable Energy Stocks’ Performance and Climate Risk: An Empirical Analysis," JRFM, MDPI, vol. 17(3), pages 1-15, March.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:3:p:121-:d:1358772
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    References listed on IDEAS

    as
    1. Lin, Boqiang & Wu, Nan, 2023. "Climate risk disclosure and stock price crash risk: The case of China," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 21-34.
    2. Painter, Marcus, 2020. "An inconvenient cost: The effects of climate change on municipal bonds," Journal of Financial Economics, Elsevier, vol. 135(2), pages 468-482.
    3. Ströbel, Johannes & Wurgler, Jeffrey, 2021. "What do you think about climate finance?," CEPR Discussion Papers 16622, C.E.P.R. Discussion Papers.
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