The Effects of Environmental Regulation on the Singapore Stock Market

Pham Pham,Mudalige Mudalige,Ramiah Ramiah,Nguyen Nguyen,Moosa Moosa

doi:10.3390/jrfm12040175

Abstract

This study examines the impact of environmental regulation on the Singapore stock market using the event study methodology. Several asset pricing models are used to estimate sectoral abnormal returns. Additionally, we estimate the change in systematic risk after the introduction of the carbon tax and related regulation. We conduct various robustness tests, including the Corrado non-parametric ranking test, the Chesney non-parametric conditional distribution approach, a representation of market integration, and Fama–French five-factor model. We find evidence showing that the environmental regulations tend to achieve their desired effects in Singapore in which several big polluters (including industrial metals and mining, forestry and papers, and electrical equipment and services) were negatively affected by the announcements of environmental regulations and carbon tax. In addition, our results indicate that the electricity sector, one of the biggest polluters, was negatively affected by the announcement of environmental regulations and carbon tax. We also find that environmental regulations seem to boost the performance of environmentally-friendly sectors whereby we find the alternative energy industry (focusing on new renewable energy technologies) experienced a sizeable positive reaction following the announcements of these regulations.

Highlights

It is widely believed that climate change and global warming are caused mainly by modern human activities, leading to catastrophic phenomena such as extreme weather events, rising sea levels, ocean acidification, and extreme precipitation (Wang et al 2017)
The results indicate that several sectors experienced an increase in both short-term and long-term systematic risk when the carbon pricing bill was passed in event 10 (Figures 1 and 2)
The alternative energy industry experienced a sizeable positive cumulative abnormal return five days before the arrival of the news that the carbon pricing bill was passed by Parliament as well as a significant decline in short-term systematic risk in certain events

Summary

Introduction

It is widely believed that climate change and global warming are caused mainly by modern human activities, leading to catastrophic phenomena such as extreme weather events, rising sea levels, ocean acidification, and extreme precipitation (Wang et al 2017). Environmental regulation, both at the national and international levels, has become a vital instrument to fight the challenges posed by greenhouse gas emissions. The economic and financial effects of environmental regulation constitute a controversial issue. The current literature documents two differing views on the impact of environmental regulation on firms. One view is that compliance with environmental regulation may produce unfavourable outcomes for firms. Based on this view, (Walley and Whitehead 1994) argue that trade-offs between environmental protection and economic performance cannot be avoided. The cost of compliance with environmental regulation can lead to deterioration in manufacturing output, employment, and corporate financial indicators

Methods

Results

Conclusion