Effects of environmental regulations on risk and return: evidence from the Italian stock market
Date
2025
Authors
Pham, H.
Ramiah, V.
Le, H.
Lowies, B.
Moosa, N.
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Journal of Sustainable Finance and Investment, online, 2025; online(1):1-30
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Abstract
This study investigates the effects of announcements of European environmental regulations on the Italian stock market. By applying the event study methodology and various asset pricing models, we evaluate the effects of announcements of stringent (lax) policies on the risk and return of polluting and environmentally-friendly industries. Furthermore, we assess the importance of concentration with respect to announcements of environmental regulations. We also propose a novel methodology to examine whether the environmental regulations are excessive. The results show that Italian sectors tend to show mixed reactions following the announcements of environmental policies. Interestingly, polluters (such as the electricity and chemicals sectors) tend to react positively to the European Union Emission Trading Scheme announcements. Furthermore, we find that most reactions occur around highly concentrated sectors. We also document a diamond risk phenomenon around the announcement dates. Finally, an excessive reaction can be observed in a relatively small number of firms.
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Copyright 2025 the author(s) (http://creativecommons.org/licenses/by-nc-nd/4.0/)
Access Condition Notes: This is an open access article