Are European Environmental Regulations Excessive?

Abstract

This paper investigates the impact of announcements of European environmental regulations on the French equity market. Using event study methodology and asset pricing models, we assess whether announcements of stringent and lax policies affect returns of environmentally-friendly businesses and polluters. Additionally, we estimate the change in systematic risk following the new regulations and develop a test to check if these effects are excessive. According to the results, the French capital market is particularly sensitive to announcements made by the European Union Emission Trading System and furthermore environmental regulations are excessive in a relatively small proportion of firms.