Essays on Sustainable Finance and Regulatory Risk

Natural experiments have a long tradition in empirical corporate finance. Event study methodology is an incumbent approach for measuring the economic impact of an event on shareholder wealth. Within this context, this dissertation covers two main subject areas. The first part offers a methodological contribution to fundamental research in the field of corporate bonds. In fixed-income research, event study methodology lags far behind event studies in the field of equity, and existing approaches are insufficiently validated. In the first article, we replicate results from the previous literature and test the methodology for robustness to event-induced variance and illiquidity. We conclude that existing methods for analysing the impact on bondholder wealth are intractable and that researchers should carefully consider sample characteristics, liquidity, and the presence of event-induced variance. The second part of this dissertation is devoted to the application of event study methodology in equity markets to test existing theoretical frameworks with regard to political and regulatory risk and uncertainty. The second and third articles focus specifically on the carbon risk hypothesis and examine whether carbon emissions are priced in by investors. We show that market reactions to regulatory announcements are driven significantly by greenhouse gas emissions. The results provide short-term evidence supporting the carbon risk hypothesis. In the fourth article, we analyse the market impact of populist success in national elections. We show that the increase in OHLC volatility in the run-up to an election is a robust proxy for the sensitivity of a stock to the election outcome. On the one hand, this dissertation thus advances research in the field of corporate bonds, and on the other hand, it contributes to the verification of existing theoretical models on the influence of regulatory and political risks and uncertainties on shareholder wealth.