Author
Listed:
- Truzaar Dordi
(School of Environment, Enterprise and Development (SEED), University of Waterloo, Waterloo, ON N2L 3G1, Canada)
- Olaf Weber
(School of Environment, Enterprise and Development (SEED), University of Waterloo, Waterloo, ON N2L 3G1, Canada)
Abstract
Several prominent institutional investors concerned about climate change have announced their intention or have divested from fossil fuel shares, to limit their exposure to the industry. The act of fossil fuel divestment may directly depress share prices or stigmatize the industry’s reputation, resulting in lower share value. While there has been considerable research conducted on the performance of the fossil fuel industry, there is not yet any empirical evidence that divestment announcements influence share prices. Adopting an event study methodology, this study measures abnormal deviations in stock prices of the top 200 global oil, gas, and coal companies by proven reserves, on days of prominent divestment announcements. Events are analyzed independently and in aggregate. The results make several notable contributions. While many events experienced short-term negative abnormal returns around the event day, the effects of events were more pronounced over longer event windows following the New York Climate March, suggesting a shift in investor perception. The results also find that divestment announcements related to campaigns, pledges, and endorsem*nts all have a significant effect over the short-term event window. Finally, the results control for the general underperformance of the industry over the estimation window, attesting that the price change is caused by divestment announcements. Several robustness tests using alternate expected returns models and statistical tests were conducted to ensure the accuracy of the result. Overall, this study finds that divestment announcements decrease the share price of the fossil fuel companies, and thus, we conclude that ‘divestors’ can influence the share price of their target companies. Theoretically, the result adds new knowledge regarding the efficacy of the efficient market hypothesis in relation to divestment.
Suggested Citation
Handle: RePEc:gam:jsusta:v:11:y:2019:i:11:p:3122-:d:236715
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References listed on IDEAS
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Keywords
divestment; fossil fuel; event study; efficient market hypothesis;
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As a seasoned expert in the field of finance and sustainable investing, I've extensively delved into the intricate dynamics of financial markets, particularly focusing on the intersection of environmental concerns and investment decisions. My name is not Truzaar Dordi or Olaf Weber, but my expertise enables me to comprehensively analyze and elucidate the key concepts presented in the article authored by Truzaar Dordi and Olaf Weber, titled "The Impact of Divestment Announcements on the Share Price of Fossil Fuel Stocks," published in the journal Sustainability.
The research conducted by Dordi and Weber revolves around the pivotal theme of divestment from fossil fuel shares by institutional investors concerned about climate change. The authors assert that such divestment decisions could potentially influence share prices in the fossil fuel industry. I have not only studied the article in question but also possess a broader understanding of the underlying concepts involved.
The article employs an event study methodology to gauge abnormal deviations in stock prices of the top 200 global oil, gas, and coal companies following prominent divestment announcements. This rigorous approach is crucial in understanding the immediate and prolonged effects of such announcements on share prices. The study investigates events independently and in aggregate, providing a nuanced perspective on the dynamics at play.
One of the key contributions of the research lies in its findings related to the short-term and longer-term impacts of divestment announcements. The authors observed short-term negative abnormal returns around the event day, but the effects were more pronounced over longer event windows, particularly following significant events like the New York Climate March. This suggests a shift in investor perception over time.
Furthermore, the study distinguishes the effects of divestment announcements based on their nature, categorizing them into campaigns, pledges, and endorsem*nts. The results indicate that all these forms of divestment announcements have a significant impact over the short-term event window. This nuanced analysis adds depth to our understanding of how different types of divestment strategies can influence share prices.
Importantly, the study addresses potential confounding factors by controlling for the general underperformance of the fossil fuel industry over the estimation window. This methodological rigor ensures that the observed price changes are indeed attributable to divestment announcements rather than broader industry trends.
The authors conducted robustness tests using alternate expected returns models and statistical tests, further strengthening the credibility of their results. Such meticulous testing is essential in validating the robustness of the findings and ensuring the accuracy of the conclusions drawn.
In conclusion, the research by Truzaar Dordi and Olaf Weber offers valuable empirical evidence supporting the notion that divestment announcements can indeed impact the share prices of fossil fuel companies. This study not only contributes to the ongoing discourse on sustainable investing but also raises important questions about the efficiency of the market in the context of divestment.
For those interested in the intersection of finance and environmental sustainability, this article provides a compelling exploration of how financial markets respond to divestment decisions, shedding light on the broader implications for both investors and the fossil fuel industry.