A study of 3,000 US firms found that under Democrat governments, firms that keep shareholders regularly informed of environmental-political risks are less susceptible to sudden crashes in their share price.
- Stricter climate change policies are significant factor in firms’ decision-making
- Transparency with investors on possible upcoming environment policies’ impact on earnings lowers share crash risk
- Openness and discussion of environmental-political risk helps avoid speculative trading
The QUT researchers Dr Sohanur Rahman, Dr Elisabeth Sinnewe and Professor Ellie Chapple, from QUT’s School of Accountancy, tested the association between discussions on environmental-political risk (EPR) in a firm’s earnings conference call (ECC) and stock price crash risk, by examining 28,933 firm-year observations covering 2002 to 2020.
In the US, ECCs are in-person, forward-looking briefings by a firm to mainly institutional investors and analysts representing other firms.
Environmental-political risk is political uncertainty about government policies affecting businesses, such as mandated cap and trade schemes or environmental regulation changes.
First author Dr Rahman said that when managers set out foreseeable environmental-political risks, they signalled a transparent and sincere approach to navigating and managing such risks.
“We found that investors gain valuable information from these discussions on EPR between firm management and investor representatives in ECCs, and this information helps reduce crash risk by reducing future speculation in the stock market,” he said.
Professor Chapple said the study showed that the effect of EPR discussion at ECC on crash risk mitigation was more pronounced for politically active firms.
“Firms that are politically active through lobbyists gain better access to information on environmental-political risks because they were close to politicians’ decision-making processes,” Professor Chapple said.
“We also found that the reduction in crash risk is greater under Democrat governments for firms with more institutional monitoring and characterised by a higher level of integrity.”
Dr Sinnewe said this study had implications for analysts, investment managers, and policymakers.
“Environmental-political risk has become a significant factor in business decision-making due to growing stricter climate change policies at the national and international level,” Dr Sinnewe said.
“As stock price crashes are attributed to an overreaction to the sudden release of stockpiled unfavourable information, these findings suggest that standardised, ie comparable and reliable, climate-related disclosures in corporate filings could provide decision-useful information to validate any discussions held in the ECCs.”
“Although it is increasingly difficult to predict the outcome of such policies, investors and management should know that greater openness and discussion of EPR can help avoid speculative trading and reduce stock price crashes.”
Environment-specific political risk discourse and expected crash risk: The role of political activism was published in the International Review of Financial Analysis.
(Image, from left: Dr Elisabeth Sinnewe, Dr Sohanur Rahman, Professor Ellie Chapple)
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