Essays on environmental risk and corporate financing policies: evidence from a Quasi-Natural experiment

Nguyen, H 2017, Essays on environmental risk and corporate financing policies: evidence from a Quasi-Natural experiment, Doctor of Philosophy (PhD), Economics, Finance and Marketing, RMIT University.

Document type: Thesis
Collection: Theses

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Title Essays on environmental risk and corporate financing policies: evidence from a Quasi-Natural experiment
Author(s) Nguyen, H
Year 2017
Abstract The economic effect of environmental issues has emerged as one the most important research topics over the past several decades. This thesis investigates the impact of increasing environmental risk on stock market reactions to firms’ major financing policies, including bank loans, seasoned equity offerings (SEOs) and dividend payouts, and documents the findings and implications in three empirical chapters. Throughout the three empirical chapters, methodologically, a difference-in-differences framework was used to exploit a shift in the stringency of environmental regulations that exogenously drive the environmental risk facing firms, namely, the ratification of the Kyoto Protocol in December 2007 in Australia. In particular, the difference in stock market reactions was compared between polluters, firms that are by definition exposed to higher environmental risk, and controlling non-polluters in the post-Kyoto period relative to the pre-Kyoto period. In this empirical setting, the endogeneity concerns, that is, the causal impacts between environmental risk and stock market reactions, have been significantly alleviated.

The first empirical chapter, Chapter 2, presents the finding that, overall, the stock market reacted significantly and positively to bank loan announcements. However, bank loan announcements of polluting borrowers elicited more positive stock price response relative to controlling non-polluting borrowers, and the difference was significantly larger following the introduction of more stringent environmental policies, that is, the period subsequent to the ratification of the Kyoto Protocol. Further, the loan announcement effect was more pronounced among borrowers in poorer information environments, as characterised by smaller borrowers, higher return volatility and smaller loans. The results are robust to alternative event windows and model specifications. Contrary to the criticism that banks are losing their ‘specialness’, the results suggest that banks provide certification over borrower environmental risk, and the certification value increases as the level of stringency of environmental policies and information asymmetry of borrowers rise.

The second empirical chapter, Chapter 3, presents the finding that, overall, the stock market reacted significantly and negatively to SEO announcements. However, the market responded more negatively to SEO announcements of polluting issuers than to those of controlling non-polluting issuers, and the reaction difference was significantly larger in the post-Kyoto period. The effect was robust after controlling for various event windows, model specifications and endogeneity using propensity score matching. Further analysis revealed that the negative effect was weaker if a SEO was underwritten, and even turned positive if the underwriters were the most reputable investment banks. In contrast, similar analysis on rights offers showed indistinguishable market reactions between polluting and non-polluting issuers. The results provide evidence on how the information asymmetry associated with SEO issues drives the negative impact of increasing environmental risk on issuer market value, and how this market imperfection can be partially resolved by investment banks through underwriting services.

In the third empirical chapter, Chapter 4, several findings are documented. First, relative to controlling non-polluters, in the post-Kyoto period, polluters were more likely to decrease cash dividend payments. Secondly, polluters reserved more cash. Thirdly, polluters more frequently announced obtaining external finance such as bank loans or SEOs. Fourthly, the market reacted more positively around the days when polluters went ex-dividend and the effect was more pronounced for more financially constrained payers. Finally, in one to two years subsequent to the ex-dividend day, polluting payers exhibited better operating performance and higher buy-and-hold abnormal returns than non-polluting payers. These results indicate that firms facing higher environmental risk are more likely to encounter financial constraints, and support the view that constrained firms tend to rely more on internal financial resources by cutting dividends and holding more cash. Further, the evidence suggests that dividend payments are an effective way for polluters to publicly reinforce their commitments on future earnings to outside investors.
Degree Doctor of Philosophy (PhD)
Institution RMIT University
School, Department or Centre Economics, Finance and Marketing
Subjects Financial Institutions (incl. Banking)
Investment and Risk Management
Keyword(s) Environmental Risk
Corporate Financing Policy
Bank Loan
Seasoned Equity Offering
Dividend Policy
Stock Market Reaction
Difference-in-Differences Method
Kyoto Protocol
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Created: Thu, 07 Dec 2017, 13:06:45 EST by Denise Paciocco
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