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Do investors care about carbon emissions under the European Environmental Policy?
Author(s) -
Basse Mama Houdou,
Mandaroux Rahel
Publication year - 2022
Publication title -
business strategy and the environment
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.123
H-Index - 105
eISSN - 1099-0836
pISSN - 0964-4733
DOI - 10.1002/bse.2886
Subject(s) - emissions trading , european union , quartile , valuation (finance) , economics , clean technology , business , market power , greenhouse gas , monetary economics , international economics , microeconomics , finance , ecology , confidence interval , statistics , mathematics , political science , law , biology , monopoly
We explore the extent to which cross‐sectional differences in carbon dioxide emissions matter for future valuations of European firms regulated under the European Union Trading Scheme (EU ETS). Counterintuitively, we find that firm‐level emissions share a robust concave relationship with future market valuations. Initially, market valuations increase in emissions potentially because emissions are considered essential for normal production processes; however, the valuation premium decreases and becomes negative beyond a threshold of emissions due to looming regulatory and transition risks. Firms in the lower quartile of emissions trade at an average premium of 2.42%, against a 20.78% discount in the upper quartile (the peak is 3.85%). Importantly, the concave relationship obtains only in smaller firms with lower analyst coverage and lower institutional ownership, and the predictive power of emissions is limited to firms with no reported investments in clean technology. Therefore, policymakers might consider promoting the development and diffusion of green technologies.