Abstract
This thesis investigates the environmental regulations, disclosures, innovations, and carbon emissions from three perspectives: (1) the impact of financial development, foreign direct investment (FDI), carbon pricing on CO2 emissions in both developed and developing economies, (2) the impact of environmental regulations, disclosures, on the idiosyncratic risk of firms in G7 countries with special attention on the Paris Agreement, and (3) the impact of CEO duality, climate risk-related MD&A, and environmental innovations on the idiosyncratic risk of the U.S. listed firms.
More specifically, the first study reported in Chapter 2 investigates the impact of financial development and FDI on CO2 emissions intensity, with a special focus on carbon pricing policies (emissions trading and taxing) in 57 developed and developing economies between 2000 and 2017. I introduce an eight-fold financial development construct in this study for the first time to quantify a country’s financial development status. I find that financial depth in institutions negatively (positively) affects the CO2 intensity of developed (developing) economies, while financial access to institutions has a negative impact in both types of economies. Financial depth (stability) in markets negatively affects developing (developed) economies’ CO2 intensity, while financial access to markets increases (decreases) CO2 intensity in developed (developing) economies. Moreover, inward FDI stock quality (a net FDI position) increases (reduces) CO2 intensity in developing (developed) economies. Finally, I document that carbon pricing in developed economies helps reverse the positive effect of inward FDI quality on CO2 intensity, implying that such a policy helps those economies attract climate-friendly FDI. This study reveals the implications of the reduction of CO2 emissions, placing the focus on both financial development and FDI fully and together for the first time.
The second study investigates the impact of country-level environmental regulations on firms’ idiosyncratic risk with a moderating impact from firm-level environmental disclosures. Using a sample of 10,324 firms headquartered in G7 countries during 2008-2020, I find that country-level environmental regulations play a dominant role in reducing idiosyncratic risk, especially for firms making disclosures, except in France. A firm’s environmental disclosure decisions directly increase its idiosyncratic risk in the U.S., the U.K., France, and Germany. Moreover, firm-level environmental disclosure decisions reduce the negative impact of environmental regulations on idiosyncratic risk, specifically in the U.S. and Japan (while increasing it in the U.K. and Canada). The Paris Agreement, adopted in 2015, tends to either reverse or reduce the negative effect of environmental regulations on firms’ idiosyncratic risk, except in Japan. Altogether, the findings of this study highlight the significant impact of macro-level environmental regulations and policy events on firm-level idiosyncratic risk.
Finally, the third study investigates the impact of CEO duality, environmental innovation decisions, and climate risk-related MD&A on the idiosyncratic risk of the U.S. firms using a sample of 1,643 listed firms during 2008-2021. CEO duality represents a single person holding both CEO and Chairmanship. I find that the presence of CEO duality significantly reduces idiosyncratic risk of firms. Climate risk-related MD&A tends to increase a firm’s idiosyncratic risk only when CEO duality exists. Furthermore, climate risk-related MD&A significantly reduces idiosyncratic risk of those firms disclosing environmental innovation decisions. Through a channel analysis, I reveal that firms’ retained earnings fully explain the impacts of the CEO duality on idiosyncratic risk, and partially explain how environmental innovation decisions reduce idiosyncratic risk. The findings of this study highlight the importance of CEOs' powerfulness in making effective climate-risk-related MD&A toward managing a firm’s idiosyncratic risk.