The Inflation Reduction Act’s Impact on the Future Cash Flow of Green Firms

Abstract

The Inflation Reduction Act, representing the biggest step in U.S. climate policy, was a major realization of transition risk. Following its announcement, equity analysts anticipate significantly higher earnings for green firms over 3 to 5 years. This projection is primarily attributed to anticipated sales growth rather than cost reductions. While earnings forecasts adjust instantly, the impact on sales emerges with a two-month delay. Interestingly, these earnings increases have not significantly altered stock recommendations. Our research contributes to the understanding of green firm performance post-climate risk realization, focusing on the influence of legislative changes on cash flow dynamics.