No News is Good News? An empirical analysis of the Scandinavian stock market reaction to negative environmental news

Abstract

This thesis exammes the market reaction to negative environmental news in the Scandinavian stock market. As leading markets within ESC practices, these countries provide an interesting insight into the incorporations of ESC actions into investors' decisions. Accordingly, we investigate whether the degree of carbon exposure or the firm's environmental incident history affects investors' expectations and, consequently, reactions. In contrast to previous research, we find no reaction to environmental news when examining the sample as a whole. While we hypothesize a different stock price reaction for carbonintensive sectors, followed by a higher increase in abnormal trading volume than non-carbon intensive ones, we find no support for these two hypotheses. We argued that investors alter their anticipations due to carbon-intensive sector characteristics and environmental regulatory risk. However, we find no difference in market reaction based on carbon exposure. Secondly, we examine whether the firms' history of environmental offenses affects investors' expectations, hypothesizing lower stock price reaction and a smaller increase in abnormal trading volume for high- compared to low-frequency offenders. We argued that a higher incident rate should reduce asymmetric information related to the firms' ESC business conduct, causing a convergence in investors' opinions. This convergence is additionally explained by the high-frequency offenders contains larger firms on average. These firms often experience higher media coverage, reducing the asymmetric information. However, we find no difference between the two groups. Nevertheless, the proposed firm size effect seems to hold. We detect an interesting relationship between market reaction and firm size, and time, respectively. Larger companies experience a less negative stock price and trading volume reaction, in line with the reduced asymmetric information argument. Concerning the time trend, we find a less negative market reaction over the decade. We argue that this reflects an increase in ESC awareness in the Scandinavian markets. Accordingly, we conclude that no news for investors, is good news for ESC awareness and the transition towards a sustainable future.