A global perspective of market reaction to environmental quality: evidence from dynamic panel approach

Abstract

This study investigates the effect of environmental quality on stock market performance in the parliamentary and presidential system with the interactive effects of democracy and Foreign Direct Investment (FDI) in 80 countries from 2006 and 2016 using a two-step GMM model. First, we test the direct effect of environmental quality, democracy and FDI on stock market performance after instrumenting and controlling for several macro-economic variables. Second, we examine the moderating effect of democracy and FDI on the relationship between environmental quality and stock market performance. Our results show that (1) environmental performance leads to an increase in stock market performance regardless of the constitutional system, (2) the level of democracy can mitigate the detrimental effect of environmental degradation and improve the stock market performance sub-sequentially in a parliamentary system and (3) FDI facilitates the link between environmental performance and the stock market in a presidential system. The results slightly vary across sub-panels.