Firm Carbon Risk Exposure, Stock Returns, and Dividend Payment by Duc Khuong Nguyen

When investors hold disproportionately high carbon emitters with associated increased carbon risk, a positive relationship exists between a firm’s carbon emissions and the association between the stock returns and dividend payment.

In this paper, published by FNEGE Médias, Duc Khuong Nguyen, Acting Dean and Managing Director at EMLV, explores whether investors disproportionately hold high-carbon emitters, thereby increasing their exposure to carbon risk and whether the stock market reacts less positively to dividend increases (and more negatively to dividend decreases).

At the same time, if firms under-price their carbon risk, the stock market reacts less positively (more negatively) to dividend increase (decrease) announcements.

The impact of carbon risk exposure on the markets

Our research investigates whether firms’ carbon risk exposure affects the
relationship between dividend announcements and stock returns.

This issue is actually highly relevant for many stakeholders because it adds to the growing body of literature on environmental Finance.

It also provides insight for corporate managers on how carbon emissions influence investor behavior, and finally, it highlights the implications of carbon Emissions on financial markets, thereby emphasizing the importance of sustainable business practices.

A two-stage study

We conduct our study in two stages:

First, we analyze firms’ carbon emissions stock returns and dividend announcements based on the comprehensive data set. Then, we examine how the stock markets react differently to Dividend announcements
from high and low-carbon emitting firms.

Our fightings show that firms with high carbon emissions experience a stronger association between stock returns and dividend payments
that means that investors pay more attention to Dividend announcements when the firm has high carbon emissions.

Regarding the stock markets, it reacts less positively to Dividend increases and more negatively to Dividend decreases uh for
firms with high carbon risk

Documenting evidence of carbon risk underpricing

More importantly, our results documented evidence of carbon risk underpricing. When firms do not have accurately priced their carbon risk, the market reacts unfavorably, two different changes.

Our study has both theoretical and managerial implications; it advances the theoretical understanding of how environmental factors and, specifically, carbon emissions affect financial markets and provides evidence that carbon risk drives investor behavior.

From the managerial perspective, corporate managers should consider carbon emissions and their associated risks when making financial decisions.

Transparent reporting of carbon risk and sustainability integration into business strategies can lead to more favourable Market Responses to Dividend announcements.

Long story short, our results highlight the critical role of carbon emissions in financial decision-making, thus offering valuable insights for investors, corporate managers, and policymakers who aim to foster a more sustainable and resilient economy.

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