Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2026-07-15
Number: 26-044/III
Author-Name: Peter Boswijk
Author-Workplace-Name: University of Amsterdam  
Author-Name: Cees Diks
Author-Workplace-Name: University of Amsterdam  
Author-Name: Simon Trimborn
Author-Workplace-Name: University of Amsterdam  
Author-Name: Matteo Valle
Author-Workplace-Name: University of Amsterdam  
Title: Environmental Regulatory Risk
Abstract: The aim of this paper is to determine from market expectations how firms are affected by risks arising from environmental regulation. We use a text-based measure of environmental regulatory stringency derived from U.S. EPA legal documents and industry-level relevance scores to capture time-varying regulatory stringency exposure. We find that environmental regulatory stringency carries a positive and statistically significant return compensation, especially for firms with high cash holdings. For firms with low cash holdings, the effect is highly volatile, showing investors are uncertain about a firm's future when faced with stricter regulation. Firms’ environmental profiles further matter, as high-emission firms' returns are negatively affected when regulatory stringency increases. Because regulatory text is released infrequently, challenging real-time risk analysis, we utilise our studies insights to derive a high-frequency, market-expectation capturing Environmental Regulatory Risk Index (ERRI). We show that ERRI captures shifts in investors’ expectations of environmental regulatory stringency and how ERRI reacts during environmental policy and political developments.
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File-URL: https://papers.tinbergen.nl/26044.pdf
File-Format: application/pdf
File-Size: 2.865.948 bytes
Handle: RePEc:tin:wpaper:20260044