Booming or sinking: How does an emission trading scheme affect enterprise value?

Abstract

Unlike prior research that shows climate policy improves enterprise value, this study reveals the negative impact of emission trading schemes (ETSs) on enterprise value under China’s unique institutional backdrop and identifies the mechanism through which this impact occurs. Data from a sample of 1 267 listed companies in the Chinese stock market from 2005 to 2018 models are analyzed using difference-in-differences (DID) and propensity score matching methods (PSM). The results suggest that ETSs have an average short-term negative impact on enterprise value, which peaks in the second year of the ETS and diminishes from the fourth year. Further analysis reveals that ETSs did not cause significant operating losses for firms but reduced their value through the market response mechanism. ETS enterprises experienced significant declines in their annual stock transaction amounts and in returns on individual shares. This indicates that investors expect ETSs to adversely affect pilot enterprises and accordingly adopt disinvestment strategies. Despite the short-term negative effect, ETSs effectively encourage enterprises to innovate green technologies to mitigate long-term carbon risk.