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How does the stock market react to the announcement of green policies?

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  • Ramiah, Vikash
  • Martin, Belinda
  • Moosa, Imad

Abstract

We investigate the impact of 19 announcements of environmental regulation on the equities listed on the Australian Stock Exchange over the period 2005–2011. Using a well-established event study methodology, we assess whether these announcements are value constructive or destructive for equity investors. Additionally, we estimate the change in systematic risk following the announcements. Our results show that the Australian market was particularly sensitive to the carbon pollution reduction scheme (CPRS) announcement. A cumulative abnormal return of −31% was recorded in the alternative energy sector after Australia submitted its target range to the Copenhagen Accord. We observe that a move towards a greener nation has a mixed effect on abnormal returns with apparent sector-by-sector differences. Green policies appear to affect the long-term systematic risk of industries, leading to the diamond risk phenomenon.

Suggested Citation

  • Ramiah, Vikash & Martin, Belinda & Moosa, Imad, 2013. "How does the stock market react to the announcement of green policies?," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1747-1758.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:5:p:1747-1758
    DOI: 10.1016/j.jbankfin.2013.01.012
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    Keywords

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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War

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