This chapter is about the financial effects of environmental regulation – more specifically the effects on stock prices and returns, profitability, market value and (financial) risk. These effects are interrelated and overlapping because: (i) changes in stock prices determine returns and changes in returns imply changes in prices; (ii) operating profitability has implications for stock prices and returns; (iii) market value (or at least the shareholders’ equity part of it) is determined by the stock price and the number of outstanding shares; and (iv) changes in returns also pertain to changes in the volatility of returns – hence implying changing risk. It is because these effects are intimately linked that it may not be easy to discuss the findings of a particular study under one heading or another. The financial effects of environmental regulation and performance manifest themselves in more than one way. The announcement of a new piece of environmental regulation (which firms must comply with) affects stock prices, returns and profitability through the anticipated (ex ante) effects on costs and revenues. Once the regulation is in place and compliance is observed, the financial effects materialize through actual (ex post) changes in costs and revenues. The ex ante and ex post effects may not work in the same direction; for example, if the realized adverse effects are smaller than had been anticipated, stock prices could rise.
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