Journal of

Risk and Financial

Management

Article
The Effects of Environmental Regulation on the
Singapore Stock Market
Huy Pham 1, * , Van Nguyen 2 , Vikash Ramiah 3 , Priyantha Mudalige 4 and Imad Moosa 5
1 School of Business and Management, RMIT University, 702 Nguyen Van Linh Blvd, District 7,
Ho Chi Minh City 700000, Vietnam
2 Faculty of Finance and Banking, Ton Duc Thang University, Ho Chi Minh City 700000, Vietnam;
nguyentranhongvan@tdtu.edu.vn
3 Faculty of Business, University of Wollongong, Dubai 00000, UAE; VikashRamiah@uowdubai.ac.ae
4 School of Economics, Finance and Property, Bentley Campus, Curtin University, Bentley 6102, Western
Australia, Australia; Priyantha.Mudalige@curtin.edu.au
5 School of Economics, Finance and Marketing, RMIT University, Melbourne 3000, Victoria, Australia;
imad.moosa@rmit.edu.au
* Correspondence: huy.phamnguyenanh@rmit.edu.vn; Tel.: +84-28-3776-1300 or +84-933-930-811




Received: 28 October 2019; Accepted: 21 November 2019; Published: 24 November 2019


Abstract: This study examines the impact of environmental regulation on the Singapore stock market
using the event study methodology. Several asset pricing models are used to estimate sectoral
abnormal returns. Additionally, we estimate the change in systematic risk after the introduction
of the carbon tax and related regulation. We conduct various robustness tests, including the
Corrado non-parametric ranking test, the Chesney non-parametric conditional distribution approach,
a representation of market integration, and Fama–French five-factor model. We find evidence showing
that the environmental regulations tend to achieve their desired effects in Singapore in which several
big polluters (including industrial metals and mining, forestry and papers, and electrical equipment
and services) were negatively affected by the announcements of environmental regulations and
carbon tax. In addition, our results indicate that the electricity sector, one of the biggest polluters, was
negatively affected by the announcement of environmental regulations and carbon tax. We also find
that environmental regulations seem to boost the performance of environmentally-friendly sectors
whereby we find the alternative energy industry (focusing on new renewable energy technologies)
experienced a sizeable positive reaction following the announcements of these regulations.

Keywords: environmental regulation; systematic risk; event study; abnormal return

1. Introduction
It is widely believed that climate change and global warming are caused mainly by modern
human activities, leading to catastrophic phenomena such as extreme weather events, rising sea levels,
ocean acidification, and extreme precipitation (Wang et al. 2017). As a result, environmental regulation,
both at the national and international levels, has become a vital instrument to fight the challenges
posed by greenhouse gas emissions. However, the economic and financial effects of environmental
regulation constitute a controversial issue.
The current literature documents two differing views on the impact of environmental regulation on
firms. One view is that compliance with environmental regulation may produce unfavourable outcomes
for firms. Based on this view, (Walley and Whitehead 1994) argue that trade-offs between environmental
protection and economic performance cannot be avoided. In addition, (Bragdon and Marlin 1972)
point out that the cost of pollution incurred by firms is a significant burden that leads to a higher level

J. Risk Financial Manag. 2019, 12, 175; doi:10.3390/jrfm12040175 www.mdpi.com/journal/jrfm

J. Risk Financial Manag. 2019, 12, 175 2 of 19

of operating costs, with a negative effect on corporate profitability. Therefore, the cost of compliance
with environmental regulation can lead to deterioration in manufacturing output, employment, and
corporate financial indicators.
In contrast, prior studies in favour of environmental regulation find evidence for favourable
outcomes associated with the adoption of high environmental standards and compliance with
environmental regulation, including management benefits, enhanced productivity, and improved
employee morale (McGuire et al. 1988). The adoption of environmentally-friendly practices
improves firms’ overall performance (Sharfman and Fernando 2008; Ameer and Othman 2012;
Nandy and Lodh 2012; Walker et al. 2014; Gupta 2018). Furthermore, (Allen 1992 and Schmidheiny
1992) find that strong environmental performance tends to lower production costs (through
eliminating waste).
According to the efficient market hypothesis (EMH), stock prices change as new information is
released, including news of environmental regulation. When environmental regulation is introduced,
firms with poor environmental records or polluted firms may face negative market reaction as reflected
in stock prices and returns. In contrast, investors realise that an environmentally-friendly firm, which
is expected to benefit from the environmental regulation, is likely to experience a positive effect.
Several studies (Ramiah et al. 2013, 2015a, 2015b; Pham et al. 2019a) focus on the relationship
between environmental performance and corporate performance (via profitability, corporate market
value, return and risk); the empirical findings of these studies are inconclusive as they find the effects
of environmental regulations vary in different countries. In general, these studies point out that
the main purpose of environmental regulations is to reduce carbon emission and they hypothesise
that: (1) polluting sectors are negatively affected by the environmental regulations; (2) environmental
regulations are positively affected by these regulations; and (3) polluting sectors are not affected (or
even exhibit positive abnormal returns) by the regulations due to passing regulatory costs on to the
consumers. We utilise these hypotheses in our study and examine how the stock market reacts to the
announcements of environmental regulations and the carbon tax in Singapore.
According to the Singapore’s emission profile published by the International Energy Agency,
Singapore is considered as one of the biggest offenders in terms of carbon emissions per capita.
The introduction of environmental regulation by the Singapore government shows its concern for
protecting the natural ecosystem in response to global warming and climate change. More importantly,
the experiences of the first mover in Southeast Asia may play a pivotal role in encouraging and
benchmarking the followers for similar regulatory commitment. In Asia, China is one of the
most active countries in battling climate change and has its own emission trading scheme (ETS).
However, the ETS has a different mechanism to that of a carbon tax1 and hence, the carbon tax
policy in Singapore is considered as the first successfully implemented carbon tax policy in Asia
(See Pham et al. 2019a for further explanation in emission trading scheme). In addition, previous
studies (Ramiah et al. 2013, 2015a, 2015b; Pham et al. 2019a, 2019b) fail to document the true effects
of carbon tax since carbon tax either fails to implement or does not exist in the countries of their
studies. Therefore, the success of Singapore carbon tax motivates us to examine the effect of carbon tax
regulation on the Singapore stock market. We apply the event study technique to explore the reaction
of the Singapore stock market to various announcements of environmental regulations, such as the
Kyoto Protocol (2006), national climate change strategy (2012), Sustainable Singapore Blueprint (2015),
and the Paris Climate Agreement (2016), that leads to the implementation of the carbon tax regulation
at the end. Moreover, since each sector may have a different level of exposure to carbon emission and
the environmental regulations may pose different threats to each sector, we expect the sectors will
experience changes in systematic risk following the announcements of environmental regulations and
we capture these changes by employing various short-term and long-term risk models.
The remainder of the paper is structured as follows. Section 2 presents a literature review on the
impacts of environmental regulations on risk and return. Section 3 describes the methodology used in
this study. Section 4 discusses the empirical findings and Section 5 concludes the paper.
J. Risk Financial Manag. 2019, 12, 175 3 of 19

2. Literature Review
According to the Intergovernmental Panel on Climate Change Special Report on Global Warming
(2018), climate change and global warming pose a fundamental threat to biodiversity, the oceans
(through acidification), weather phenomena, and the global economy. Businesses are no exception
to these threats as they are likely to encounter uncertainty and change in demand, as well as higher
levels of risk and operational costs arising from more extreme weather. Thus, all enterprises need to
assess and act on the uncertainty of climate change, transform businesses, and uncover opportunities
to avoid going bankrupt. Linnenluecke et al. (2016) stated that “this research field engages with
climate change as one of the most pressing concerns facing humanity, and brings together financial
and natural science research” and suggested that “it offers a rich avenue for future research on how
financial decision-making relates to the need to act on environmental concerns”.
Several studies have been conducted on carbon finance to address the efficiency of associated
financial instruments on environmental protection. Different environmental policies are considered
as helpful tools that can be used to reduce carbon dioxide emissions at the lowest cost
(Abolhosseini and Heshmati 2014) and attract a higher level of venture capital related to renewable
energy sources (Criscuolo and Menon 2015). Moreover, financial institutions and financial innovations
have an important and bigger role to play in the transition to lower-carbon energy (Hall et al. 2017;
Pathania and Bose 2014). Linnenluecke et al. (2015a) examined several studies on climate change
which they linked to accounting and finance literature and found that accounting and finance can
support organisational climate change adaptation. In addition, Linnenluecke et al. (2015b) studied
the divestment campaign and argued that divestment by itself is not enough to mitigate the effects of
climate change.
There are two sides to the debate about the influence of environmental regulation. According
to Stewart (1993), firms operating in countries where regulations are not stringent or not enforced
do not incur much compliance costs. Thus, the author believes that environmental regulation has a
negative effect on international competitiveness. Moreover, stringent regulatory enforcement not only
leads to higher costs but also pushes firms’ capital resources away from other potential projects to
invest in green technologies—as a result, future productivity growth may diminish. The negative
impact of environmental regulation on productivity may arise because firms are forced to comply with
“non-productive” activities such as waste treatment, disposal management, and auditing activities
(Lanoie et al. 2008; Christainsen and Haveman 1981; Gray and Shadbegian 1993).
On the other hand, studies have been conducted on the effect of environmental regulation on
risk and return in stock markets. Dowell et al. (2000) and Halkos and Sepetis (2007) argued that
firms with improved environmental management systems may experience a reduction in perceived
risk and boost their market values. They suggest firms that comply with environmental regulation
are likely to produce improved stock market performance and note that no evidence is available to
support the proposition that firms pursuing lower local environmental standards may save production
costs. They also note that firms moving downwards from existing higher environmental standards are
likely to violate corporate routines, which would cost them more when making a new investment.
Another positive effect of compliance with environmental standards is an enhanced public image,
which boosts employee morale and corporate reputation. Last, but not least, they argue that firms can
reduce their operating costs and eliminate pollution by changing production processes and applying
modern “eco-efficiency” technologies with high resource productivity. In an Australian market-based
study, Ramiah et al. (2013) found that abnormal returns are linked to environmental announcements.
They show that environmentally-friendly firms tend to experience positive abnormal returns while
polluting firms experience unfavourable results when the objective of environmental regulation is to
punish polluters.
Hamilton (1995), White (1996), and Klassen and McLaughlin (1996) used the event study
methodology to examine the reaction of firms to announcements of toxic emissions. These
studies showed that firms with stronger environmental management practices experience significant
J. Risk Financial Manag. 2019, 12, 175 4 of 19

positive returns, which is not the case for firms with a lower level of environmental compliance.
Interestingly, some studies find that environmental regulation has failed to meet its aim. For example,
Nieto et al. (2018) showed that the ineffectiveness of the Paris Agreement’s objective can be explained
by socio-economic and biophysical constraints. Moreover, Veith et al. (2009) and Ramiah et al. (2013)
found that the biggest polluters in the Australian market are not influenced by green policies, which
can be attributed to the ability of polluters to pass the cost of environmental regulation to consumers.
Ramiah et al. (2015a, 2015b) examined the effects of environmental regulations in China and the
US and their results showed that the environmental policies may not achieve the desired objectives.
Pham et al. (2019a) also found mixed results whereby several polluters experienced negative abnormal
returns whereas other polluters produced positive abnormal returns in France. Thus, they expressed
scepticism about the effectiveness of environmental regulation and suggested that regulators may need
to take this observation into consideration when formulating regulatory measures. Since Singapore
has been delaying the introduction of a carbon tax over the years (i.e., that could be considered as
an act of refining the policy), the empirical evidence from the Singapore stock market is expected to
provide a significant contribution to the literature.
Several studies have examined the impact of environmental regulation on short-term and
long-term systematic risk in different sectors. Whenever an announcement is made, systematic risk
is predicted to rise for polluting sectors. In contrast, green sectors are expected to experience a
decrease (increase) in systematic risk when eco-friendly legislation is adopted (rejected). A study of
Feldman et al. (1997) of about 300 US firms provided evidence indicating that companies adopting a
more environmentally-friendly posture may experience favourable attainment of perceived riskiness to
investors, cost of equity capital, and market value. Moreover, Ramiah et al. (2013) showed a diamond
risk structure resulting from the uncertainty associated with environmental regulation. The introduction
of stringent environmental policies produces an upward (downward) trend in the systematic risk of
polluting (environmentally-friendly) enterprises. However, the delayed announcements lead to a higher
degree of uncertainty, creating unusual risk-shifting behaviour. On the other hand, Pham et al. (2019a)
found that different environmental policies could lead to different outcomes in systematic risk in which
the authors show a certain set of regulations can lead to a diamond risk structure while another set of
regulations can lead to a three-distinct-outcomes risk structure. Since the empirical evidence in the
literature is not in unison, it is important to investigate how the shape of the risk structure will change
following the announcements of environmental regulations and the carbon tax.

3. Methodology

3.1. Measurement of Abnormal Returns

We adopted and modified the event study methodology of Brown and Warner (1985) to examine the
effects of Singapore’s environmental regulatory announcements on the stock market. This methodology
is considered as the best methodology to apply in this study since it can examine how the stock markets
react following every single event such as environmental regulation or carbon tax announcements.
In addition, the methodology has been widely applied in various studies in the field of environmental
finance (Ramiah et al. 2013; Pham et al. 2019a, 2019b). When an announcement is considered as
favourable (unfavourable) news to a particular sector, we expect the sectors to generate positive
(negative) abnormal returns. No abnormal returns should be observed when the news is considered
insignificant. The three possibilities are represented as follows:
P
s DARit
> 0, (1)
N
P
s DARit
< 0, (2)
N
J. Risk Financial Manag. 2019, 12, 175 5 of 19

P
s DARit
= 0, (3)
N
where !
PIit  
DARit = ln − β0it + β1it rmkt − r f t . (4)
PIit−1
P
S DARit
N is the daily abnormal return of sector s, DARit is the daily abnormal return of firm i at time t,
N is the number of firms within a sector, PIit is the price index of firm i at time t, β0it and β1it are the
intercept and the slope of the CAPM model, respectively, rmkt is the Singapore market index and r f
is the risk-free rate. While estimating abnormal returns, we remove the firms associated with each
announcement from the underlying sector to control for any possible effects these firms might have
on that sector. The standard t-statistic is used to check if a reaction is statistically significant for each
announcement.
As the market might experience a delayed reaction, continue to react or anticipate a carbon tax
announcement (in other words, EMH simply fails), we estimate cumulative abnormal returns of 5 days
after the event date and 5 days before the event date to capture these reactions. Cumulative abnormal
returns are estimated as follows:
Xd
CAR(d)st = DARst+n , (5)
n=1

d0
X
CAR(d0)st = DARst+n , (6)
n=−1

where CAR(d)st is the cumulative abnormal return of d days (d = 5 days after the event date) of sector s
at time t and CAR(d0)st is the cumulative abnormal return of d0 days (d0 = 5 days before the event date)
of sector s at time t. The t-statistic is used to check if the results are statistically significant.

3.2. Robustness Checks

As stock markets grow, the asset pricing model, which only controls for the market risk premium,
becomes inadequate. As a result, more advanced models have been developed to control for
various risk factors such as size (SMB), value (HML), profitability (RMW) and investment (CMA)
Fama and French (1993, 2015). Therefore, we apply the Fama–French five-factor model to re-estimate
expected returns and abnormal returns to check if the findings are consistent as more risk factors are
included in the asset pricing model. The modified model is specified as follows:
!
PIit  
DARit = ln − β0it + β1it rmkt − r f t + β2it (SMB) + β3it (HML) + β4it (RMW ) + β5it (CMA) + εit , (7)
PIit−1

where β0it is the intercept of the Fama–French five-factor model, β1it , β2it , β3it , β4it and β5it are coefficients
of market risk premium, size, value, profitability and investment factors, respectively, and εit is the
error term.
According to Ramiah et al. (2015a, 2015b), abnormal returns are high around event dates and
relatively low otherwise, which leads to the possibility of distorting the distribution of abnormal returns
due to high kurtosis, positive skewness, and non-normality. For this reason, we use the non-parametric
ranking test proposed by Corrado (1989) and the non-parametric conditional distribution introduced
by Chesney et al. (2011) to validate the results.
To implement the Corrado (1989) non-parametric ranking test, abnormal returns are converted
into ranks over a period of 260 days where the rank of each firm i at time t, Kit , is calculated as:
! !
PIit 0 1
 
Kit = rank ln − βit + βit rmkt − r f t . (8)
PIit−1
J. Risk Financial Manag. 2019, 12, 175 6 of 19

Since the ranks are closer to each other (from 1 to 260) in comparison to the actual values, they are
more likely to be normally distributed. The 260 days consist of 244 days prior to and 15 days after the
event dates. We then compare the rank of each sector with the expected average rank, Ki , at time t
which is calculated as:
260 days
Kit = 0.5 + = 130.5. (9)
2
The non-parametric rank t-statistic is calculated as follows:

1 PN
N i=1 (Kit
− 130.5)
tCorrado =   , (10)
stdev Kit
 
where stdev Kit is calculated as:
v
u
260
t
  1X 1 X
stdev Kit = 2
(Kit − 130.5)2 , (11)
T N
t=1

where Kit is the average rank.

The results of the non-parametric ranking test are valid from a statistical point of view, since it
deals with non-normality, particularly when it is applied to skewed and/or leptokurtic distributions
(Ataullah et al. 2011). In addition, we conduct a non-parametric conditional distribution test to
address the non-normality of returns. We use the kernel regression technique, which does not assume
any underlying distribution, and check the conditional cumulative probability of the return. If the
conditional cumulative probability has a value of less than 0.05, we conclude that the event has an
extreme effect on the market.
Since the Singapore stock market is highly integrated with other international stock markets, we
control for asynchronicity, market integration, and spillover effects from those markets by incorporating
Europe Europe
rAsia
three market risk premia representing Asia (emkt
rAsia
−eft
rmkt −e
), Europe (e rft rUS
), and the U.S. (emkt
rUS
−eft
)
into the CAPM. Subsequently, abnormal returns are re-estimated to check for the impact of stock
market integration and spillover effects. For this purpose, the following equation is used:
     
PIit Europe Europe
   
DARit = ln PIit−1 − [β0it + β1it rmkt − r f t ] + β2it erAsia
mkt
r
−e Asia + β3 e
ft
r
it mkt
r
−e ft
+ β 4 e rUS −e
it mkt
rUS + ε ,
ft it (12)

where β2it , β3it and β4it are the coefficients on the market risk premia for Asia, Europe, and the U.S.,
respectively, and εit is the error term. The standard t-statistic is used to determine if the re-estimated
abnormal returns are statistically significant.

3.3. Estimating Changes in Systematic Risk

The introduction of stringent policies represents a risk factor for polluters. Likewise, lax
environmental policies can be viewed as uncertainty for environmentally-friendly businesses.
The environment in which firms conduct business changes significantly with the adoption of
environmental regulation whose effects on systematic risk are unknown. To test for changes in
systematic risk, asset pricing models are modified to incorporate interaction variables. The first
model captures the average change in risk resulting from the introduction of regulation. Following
Ramiah et al. (2013), an aggregate dummy variable (AD) is used to represent the events, which assumes
a value of one on the event date and zero otherwise. An interaction variable is obtained by multiplying
AD by the market risk premium, which gives:
h i h i
r f t = β0I + β1I e
rIt −e
e r f t + β2I e
rmt −e r f t ∗ ADt + β3I ADt + e
rmt −e εit , (13)
J. Risk Financial Manag. 2019, 12, 175 7 of 19

where erIt is industry i’s return at time t, e r f t is the risk-free rate at time t, e rmt is market return at time t,
AD is a dummy variable, which assumes a value of one on the event date and zero otherwise, e εit is the
error term, βI is the intercept term such that E(βI ) = 0, βI is the average short-term systematic risk of
0 0 1

the industry, β2I is a measure of systematic risk for each industry, and β3I is a measure of the change in
the intercept of Equation (13). By estimating Equation (13), the aggregate effect of the events on the
stock market can be calculated.
The effects of opposite outcomes from different events may cancel out each other, which is a problem
that can be dealt with by introducing an individual dummy variable (ID) for each announcement,
taking a value of one on the event date and zero otherwise. By doing that, it becomes possible to
identify the exact contribution of each event. Short-term changes in systematic risk following the
announcement of environmental regulation can be captured by the coefficients on interaction variables,
which are obtained by multiplying each dummy variable by the market risk premium. In this case,
we have: h i XN h i
r f t = β0I + β1I e
rIt −e
e rmt −e rft + β2I,n ermt −e εit ,
r f t ∗ ID gt + e (14)
g=1

where g = 1, 2, · · · , N represents event number. To study the long-term effects on systematic risk,
Equations (13) and (14) are re-estimated by making the aggregate dummy variable (AD) assume the
value of zero prior to the event and one afterwards. The individual dummy variables (ID) assume a
value of zero prior to the event and one afterwards.
Since the empirical results are obtained by using the event study methodology, it may be
worthwhile saying something about recent developments in this field. The most recent development is
the method suggested by Borochin and Golec (2016) to measure the full value effect of an event for
firms with traded options, given the argument that event studies typically provide a measure of only
a fraction of the full effect because no adjustment is made for the market anticipation of that event.
This method represents a generalisation of earlier work (Subramanian 2004; Barraclough et al. 2013;
Borochin 2014) to disentangle the value effects caused by the announcement merger (the expected
synergy value and the signals about the stand-alone values of the target firm and bidding firm). In
this respect, unique information is extracted from option prices and used to identify the synergy and
stand-alone values, along with the ex-ante probability that the merger will materialise.
The proposition that good estimates of event probabilities could be useful can be traced back to
Brennan (1990), who suggested that stock price changes due to partly anticipated events must be adjusted
to obtain a proper measure of the full value effect of an event. It has been suggested that firm-specific
attributes can be used to estimate the ex-ante event probability (Malatesta and Thompson 1985;
Acharya 1993; Chaplinsky and Hansen 1993; Prabhala 1997; Song and Walkling 2000; Cai et al. 2011;
Bhagat et al. 2005). The potential problem with this approach is that data on relevant firm-specific
attributes may be scarce.
Borochin and Golec (2016) showed that the observed price change on the event announcement
date can be used to measure the full effect of an event on a company’s per-share value. Instead, they
present a model whereby a firm’s stock and option prices are used to identify the unknown parameters
that can be used to determine the full effect. They also discuss some potential complications that could
impact the identification strategy and offer a way to assess the reasonableness of the estimated effects.
Notwithstanding the merits of this approach, its implementation in this study is problematical, at
least because it is applicable only to firms with traded options. Since our study is conducted on a
comparative basis, even partial effects will do.

4. Data and Results

4.1. Data and an Overview

The daily data series used to conduct the empirical work were downloaded from Datastream
over the period from 2004 to 2018. The variables include individual stock prices, the Singapore stock
market index (as a proxy for the market), and the 10-year bond yield (as a proxy for the risk-free rate).
J. Risk Financial Manag. 2019, 12, 175 8 of 19

The Datastream classification standards are applied to construct industry portfolios that include 37
sectors. Table 1 lists 10 important announcements on environmental regulations and the carbon tax
collected from various institutional websites: the European Union, the Singapore Ministry of Foreign
Affairs, and the Singapore Ministry of the Environment and Water Resources.

Table 1. Announcements on environmental regulation.

Date Event Description

12 April 2006 1 Singapore ratified the Kyoto Protocol
11 July 2006 2 Date of entry into force of Singapore into the Kyoto Protocol
The National Climate Change Secretariat released the National
12 July 2012 3 Climate Change Strategy (NCCS-2012), outlining Singapore’s plans to
address climate change through a whole-of-nation approach
Singapore ratified the Doha Amendment to the Kyoto Protocol, an
24 September 2014 4 international climate change agreement that formalises the nation’s
commitments from 2013 to 2020
Prime Minister Lee Hsien Loong unveiled the Sustainable Singapore
8 November 2014 5
Blueprint (SSB) 2015
22 April 2016 6 Singapore signed the Paris Agreement
21 September 2016 7 Singapore ratified the Paris Agreement
Singapore government announced a new carbon tax which will come
20 February 2017 8
into force by 2019
All facilities producing 25,000 tonnes or more of greenhouse gas
19 February 2018 9 emissions in a year will have to pay a carbon tax from 2020, Finance
Minister Heng Swee Keat announced
The carbon pricing bill, which sets out a framework for implementing
20 March 2018 10 the carbon tax, including the measurement, reporting and verification
requirements, was passed in Parliament

Table 2 provides information about the effect of the environmental regulations on the Singapore
stock market as reflected in abnormal returns. In general, more than half of the sectors were significantly
influenced by announcements. The results show that only three sectors, which accounted for 8%
of 37 sectors, experienced both positive and negative reactions to the announcements. While the
percentage of sectors exhibiting positive abnormal returns (AR) was 27%, 24% of total sectors exhibited
negative ARs.
J. Risk Financial Manag. 2019, 12, 175 9 of 19

Table 2. Sectoral reactions following the announcements of environmental regulation.

Robustness Tests
CAPM Corrado Chesney Market Integration Fama–French 5 Factor
Sector Date AR (%) t-Stat tCorrado CP t-Stat AR (%) t-Stat AR (%) t-Stat
Positive Reactions
Aerospace and Defense 12 April 2006 3.27 2.46 2.33 0.13 1.26 0.00 0.00 −0.21 −0.16
11 July 2006 3.72 2.78 −0.48 0.47 0.09 −0.01 −0.01 −0.02 −0.01
Food Producers 19 February 2018 1.75 2.54 2.82 0.10 1.48 −0.43 −0.74 −0.05 −0.08
Food and Drug Retailers 19 February 2018 1.17 2.07 1.92 0.04 2.15 0.11 0.21 0.15 0.26
Gas, Water and Multiutilities 19 February 2018 2.45 2.81 2.77 0.30 0.55 0.13 0.16 0.66 0.79
Mining 19 February 2018 3.92 2.25 2.06 0.32 0.49 0.28 0.17 0.77 0.44
Mobile Telecommunication 19 February 2018 1.74 2.60 2.19 0.37 0.34 −0.74 −1.18 −1.04 −1.66
Pharmaceuticals and Biotechnology 12 July 2012 19.16 6.38 0.31 0.50 0.00 0.13 0.05 0.06 0.02
Real Estate Investment and Services 19 February 2018 1.31 1.97 2.57 0.11 1.43 0.69 1.22 0.80 1.32
Real Estate Investment Trust 19 February 2018 0.82 2.49 1.77 0.06 1.92 −0.38 −1.57 −0.29 −1.17
Technology Hardware and Equipment Services 24 September 2014 2.05 2.14 0.73 0.02 2.69 −1.29 −1.27 −1.31 −1.32
Negative Reactions
Beverages 12 July 2012 −2.12 −1.98 −2.40 0.47 0.09 −0.45 −0.42 −0.57 −0.53
Chemicals 12 April 2006 −5.20 −2.32 −1.48 0.04 2.28 0.04 0.02 −0.22 −0.11
Electrical Equipment and Services 10 November 2014 −2.49 −2.34 −0.82 0.08 1.67 1.33 1.43 1.14 1.18
22 April 2016 −2.74 −2.11 0.03 0.01 3.22 1.02 0.82 0.91 0.75
Forestry and Papers 20 February 2017 −4.92 −2.02 −1.84 0.14 1.23 −2.76 −1.28 −2.73 −1.25
Industrial Engineering 11 July 2006 −2.34 −2.20 −1.20 0.14 1.19 −0.41 −0.40 −0.13 −0.14
10 November 2014 −1.36 −2.15 −1.30 0.50 0.00 0.78 1.25 0.56 0.89
Industrial Metals and Mining 12 July 2012 −4.14 −2.64 −0.50 0.33 0.48 −0.65 −0.43 −0.75 −0.50
Leisure Goods 24 September 2014 −4.44 −2.11 −1.74 0.50 0.01 −2.91 −1.35 −3.32 −1.52
Media 12 July 2012 −12.98 −4.83 −1.36 0.50 0.00 −1.08 −0.45 −1.26 −0.51
Travel and Leisure 24 September 2014 −1.53 −2.12 −0.44 0.15 1.16 1.49 2.24 1.34 1.98
Mixed Reactions
General Retailers 21 September 2016 2.60 2.20 0.96 0.08 1.61 −0.73 −0.65 −0.75 −0.69
20 March 2018 −2.62 −2.59 −1.19 0.45 0.13 −0.33 −0.33 0.33 0.31
Healthcare Equipment and Services 22 April 2016 −3.82 −2.35 0.62 0.43 0.18 −0.01 −0.01 −0.32 −0.20
21 September 2016 3.74 2.90 0.81 0.08 1.69 2.10 1.40 1.99 1.33
Household Goods and Home Construction 20 February 2017 3.70 2.27 1.22 0.01 3.18 1.61 1.04 1.68 1.07
19 February 2018 −2.39 −2.01 0.24 0.10 1.50 0.53 0.40 0.30 0.22
J. Risk Financial Manag. 2019, 12, 175 10 of 19

4.2. Sectors Reacting Negatively

Table 2 reports statistically significant abnormal returns and their t-statistics on the first day of
trading following the announcements on environmental regulations and the carbon tax. Nine sectors
were affected negatively: beverages; chemicals; electrical equipment and services; forestry and
papers; industrial engineering; industrial metals and mining; leisure goods; media; and travel and
leisure. The carbon tax is seen as a core policy to reduce CO2 emissions by imposing a fee on
the burning of carbon-based fuels. Thus, the carbon tax (or environmental regulation in general)
discourages environmentally-unfriendly businesses by raising production costs, leading to negative
abnormal returns.
The environmental regulations in Singapore seem to be effective because all big polluters
experienced negative abnormal returns when the underlying announcements were made. For example,
the industrial metals and mining sector, the chemicals sector, the forestry and papers sector, and
electrical equipment and services sector attained abnormal returns of −4.14% with a t-statistic of
−2.64, −5.20% with a t-statistic of −2.32, −4.92% with a t-statistic of −2.02, and −2.49% with a
t-statistic of −2.34, respectively. Following the ratification of Doha Amendment, which is the Protocol’s
second commitment, on 24 September 2014 (announcement 4), leisure goods and travel and leisure
sectors had negative reactions of −4.44% (with a t-statistic of −2.11) and −1.53% (with a t-statistic
of −2.12). Obviously, the unfavourable results are interpreted to imply that the sectors focusing on
recreation and tourism-related products produce emissions, solid waste, and littering. Consistent
with Ramiah et al. (2013) and Pham et al. (2019a), we did not find evidence of a negative reaction
from the electricity sector, which is one of the biggest polluters, on the announcement days. We
postulate that the sector either successfully passes on the cost to consumers or experiences a delayed or
anticipated reaction.
Surprisingly, however, industrial engineering with new technology and more sustainable
operations still produced a negative AR of −2.34% with a t-statistic of −2.20 upon the implementation
of the Kyoto Protocol, and AR of −1.36% with a t-statistic of −2.15 when Prime Minister Lee Hsien
Loong unveiled the Sustainable Singapore Blueprint. A plausible explanation for the unfavourable
result is that a shift to a greener country will cause an increase in energy prices and undesirable impact
on return, particularly with a large proportion of energy investment (Garnaut 2018).

4.3. Sectors Reacting Positively

We document significantly positive responses in 10 sectors including aerospace and defense; food
producers; food and drug retailers; gas, water and multiutilities; mining; mobile telecommunication;
pharmaceuticals and biotechnology; real estate investment and services; real estate investment trust;
and technology hardware and equipment services. Following event 1 on (12 April 2006) and event 2
(11 July 2006) when Singapore ratified the Kyoto Protocol, the aerospace and defense sector welcomed
this news with positive abnormal returns of 3.27% with a t-statistic of 2.46 and AR of 3.72% with a
t-statistic of 2.78. These results may be a failure of the Kyoto Protocol to target big polluters because of
the ability of this industry to pass on the extra cost to consumers (Ramiah et al. 2013).
Interestingly, seven out of these ten sectors experienced favourable results following the release
of the news that all facilities producing 25,000 tonnes or more of greenhouse gas emissions in a year
will have to pay the carbon tax, which Finance Minister Heng Swee Keat announced on 19 February
2018 (announcement 9). In addition, pharmaceuticals and biotechnology reacted positively with an
abnormal return of 19.16% when the National Climate Change Strategy was announced (announcement
3). Technology, hardware and equipment services also experienced a positive abnormal return of
2.05% on 24 September 2014 (announcement 4). These findings are, however, contradictory to those of
Pham et al. (2019a), in which the authors show that the two sectors were negatively affected by the
environmental regulations. A plausible explanation for this contradiction is the difference in terms
of production processes used by French firms and Singaporean firms. Because the environmental
regulation and especially the carbon tax are designed to punish big polluters and encourage firms to
J. Risk Financial Manag. 2019, 12, 175 11 of 19

utilise cleaner or renewable energy, these sectors are likely to have found opportunities to apply green
technological techniques in their production (hence they reacted positively).

4.4. Mixed and No Reactions

The results indicate that several sectors exhibit mixed reactions, such as the general retailers sector,
the healthcare equipment and services sector, and the household goods and home construction sector.
It is clear that the household goods and home construction sector is a good example of a sector that
reacts differently to different announcements of environmental regulation. It reacted positively with an
abnormal return of 3.70% (with a t-statistic of 2.27) to event 8 and negatively with an abnormal return
of −2.39% (with a t-statistic of −2.01) to event 9.
The results also show that 17 sectors did not experience any reaction on the first day of trading
following announcements of the carbon tax. It is worthwhile to note that the construction and materials
sector, the electricity sector, and the oil and gas sector were not affected by the announcements.
It appears that the policy is ineffective because of the ability of these sectors to pass the cost on to
consumers. However, an argument against is that consumers may consider replacing the need for
alternative energy due to the rise in product prices and enthusiasm for a green living environment.
Thus, this environmental policy is still meaningful for the purpose of slowing global warming and
climate change.

4.5. The Pattern of CARs

According to the efficient market hypothesis (EMH), the stock market reacts immediately to any
new information. If this is true, then abnormal returns can be observed on the first day of information
message arrival but not in the following days. However, the principles of behavioural finance tell us that
market participants with conservatism bias (representativeness bias) may experience under-reaction or
over-reaction to new information.
Tables 3 and 4 show market anticipation and delayed reaction five days before or five days after the
announcements (as measured by the cumulative abnormal return, CAR(−5) and CAR5 respectively).
Overall, 22 sectors in Table 3 accounted for over 50% of total sectors that experienced positive CAR(−5),
while the numbers of sectors exhibiting negative and mixed results are 2 and 1, respectively. In Table 4,
conservatism-biased traders have a tendency to react slowly to new information, leading to the
phenomenon of a delayed reaction. We can see that sectors with positive CAR5 held an impressive
30% of the total sectors of the Singapore stock market, whereas four and three sectors experienced
negative CAR5 and mixed outcomes, respectively.
J. Risk Financial Manag. 2019, 12, 175 12 of 19

Table 3. Market anticipation following the announcements of environmental regulation.

Robustness Tests
CAPM Chesney Market Integration Fama−French 5 Factor
CAR(−5) CAR(−5)
Sector Date CAR(−5) t-Stat CP t-Stat t-Stat t-Stat
(%) (%)
Positive Reactions
Alternative Energy 20 March 2018 126.09 2.77 0.47 0.08 −0.09 −0.08 −0.04 −0.04
Automobiles and Parts 20 February 2017 6.44 2.42 0.50 0.01 0.09 1.33 0.09 1.33
19 February 2018 4.31 2.02 0.03 2.36 0.03 0.53 0.03 0.45
Banks 19 February 2018 3.88 2.02 0.02 2.75 0.09 2.78 0.07 2.01
Beverages 22 April 2016 20.46 2.93 0.03 2.39 0.21 1.48 0.19 1.36
Electrical Equipment and Services 20 February 2017 5.96 2.30 0.36 0.37 0.07 0.93 0.06 0.76
Forestry and Papers 22 April 2016 7.34 2.18 0.02 2.85 0.05 0.66 0.05 0.67
20 February 2017 17.28 3.62 0.08 1.65 0.07 0.68 0.07 0.70
General Industrials 11 July 2006 6.63 2.07 0.15 1.18 0.02 0.25 0.03 0.39
General Retailers 20 February 2017 4.02 1.99 0.01 3.81 0.03 0.52 0.02 0.35
Healthcare Equipment and Services 12 July 2012 9.51 2.67 0.02 2.77 0.06 0.97 0.11 1.64
Industrial Engineering 20 February 2017 3.91 2.47 0.17 1.06 0.08 1.91 0.07 1.67
Industrial Metals and Mining 12 April 2006 4.79 2.01 0.06 1.82 0.08 1.24 0.05 0.81
21 September 2016 4.92 2.13 0.11 1.38 0.06 0.95 0.06 0.97
Leisure Goods 21 September 2016 10.76 2.38 0.30 0.56 0.06 0.43 0.07 0.46
Life Insurance 24 September 2014 3.67 2.06 0.45 0.13 0.03 0.94 0.04 1.19
19 February 2018 4.28 2.05 0.41 0.23 0.04 0.93 0.04 0.93
Media 22 April 2016 9.06 2.04 0.08 1.61 0.03 0.17 0.01 0.05
19 February 2018 7.28 2.13 0.04 2.29 0.10 1.15 0.08 0.90
Mining 12 April 2006 13.71 2.45 0.01 3.21 0.19 1.20 0.11 0.73
Nonlife Insurance 12 July 2012 5.50 2.12 0.02 2.72 −0.01 −0.23 0.01 0.11
Oil and Gas Producers 11 July 2006 20.74 2.42 0.12 1.34 0.12 0.67 0.12 0.65
Personal Goods 10 November 2014 7.17 2.31 0.01 3.90 −0.06 −0.64 −0.08 −0.93
20 February 2017 12.78 3.67 0.47 0.08 0.12 1.57 0.14 1.73
Real Estate Investment and Services 21 September 2016 4.05 3.35 0.13 1.29 0.04 1.44 0.05 1.51
Software 10 November 2014 9.63 2.92 0.01 3.98 −0.03 −0.37 −0.03 −0.35
Fixed Line Telecommunication 20 February 2017 14.93 5.49 0.30 0.55 0.13 1.91 0.13 2.01
19 February 2018 11.94 3.65 0.03 2.56 0.23 2.90 0.22 2.83
Travel and Leisure 24 September 2014 4.58 3.10 0.00 7.44 0.03 0.91 0.03 1.07
20 February 2017 5.65 2.97 0.02 2.61 0.07 1.08 0.06 1.00
Negative Reactions
Mobile Telecommunications 19 February 2018 −3.55 −2.73 0.49 0.01 −0.03 −1.09 −0.04 −1.56
Real Estate Investment Trust 12 April 2006 −7.18 −3.56 0.19 0.97 −0.01 −0.29 0.00 −0.08
Mixed Reactions
Aerospace and Defense 24 September 2014 −6.50 −2.10 0.47 0.07 −0.05 −0.60 −0.05 −0.67
20 March 2018 7.78 2.01 0.02 2.76 0.10 0.95 0.09 0.87
J. Risk Financial Manag. 2019, 12, 175 13 of 19

Table 4. Delayed Reaction following the Announcement of Environmental Regulation

Robustness Tests
CAPM Chesney Market Integration Fama−French 5 Factor
Sector Date CAR5 t-Stat CP t-Stat CAR5 (%) t-Stat CAR5 (%) t-Stat
Positive Reactions
Alternative Energy 12 April 2006 43.10 2.57 0.02 2.63 0.24 0.53 0.35 0.79
Chemicals 12 April 2006 16.78 3.84 0.03 2.36 0.16 1.68 0.14 1.49
Construction and Materials 12 April 2006 7.18 2.46 0.27 0.64 0.14 2.12 0.11 1.73
Electrical Equipment and Services 12 April 2006 6.07 2.51 0.28 0.63 0.03 0.63 0.03 0.54
Financial Services 12 April 2006 4.85 1.97 0.14 1.24 0.03 0.47 0.03 0.44
Food Producers 12 April 2006 5.63 2.24 0.10 1.44 0.07 1.05 0.03 0.57
Food and Drug Retailers 19 February 2018 2.73 2.12 0.06 1.94 0.04 1.65 0.04 1.40
Healthcare Equipment and Services 12 April 2006 7.95 2.06 0.03 2.47 0.14 1.23 0.15 1.39
Industrial Engineering 12 April 2006 6.06 2.79 0.32 0.50 0.06 1.34 0.05 1.30
Life Insurance 12 July 2012 7.30 2.83 0.06 1.91 0.07 1.74 0.10 2.34
Media 12 April 2006 8.06 2.65 0.43 0.19 0.10 1.16 0.08 1.00
12 July 2012 8.19 2.14 0.50 0.00 −0.06 −0.56 −0.04 −0.35
Oil and Gas Producers 12 April 2006 23.75 3.01 0.12 1.31 0.26 3.13 0.17 2.18
Technological Hardware and Equipment 21 September 2016 7.33 2.93 0.01 3.09 0.07 0.95 0.08 1.10
Negative Reactions
Mobile Telecommunications 11 July 2006 −5.10 −2.85 0.02 2.84 −0.05 −1.40 −0.05 −1.25
Nonlife Insurance 12 July 2012 −6.05 −2.37 0.00 4.29 −0.01 −0.23 0.01 0.11
Personal Goods and Home Construction 19 February 2018 −8.36 −2.87 0.12 1.30 −0.07 −0.89 −0.09 −1.17
Software 10 November 2014 −6.78 −2.05 0.06 1.87 0.02 0.22 0.02 0.21
22 April 2016 −14.16 −2.29 0.40 0.26 −0.06 −0.36 −0.09 −0.50
Mixed Reactions
Industrial Metals and Mining 12 April 2006 8.16 3.44 0.02 2.74 0.08 1.24 0.05 0.81
19 February 2018 −6.88 −2.26 0.07 1.80 −0.05 −0.74 −0.06 −0.83
Electricity 12 April 2006 19.92 2.75 0.02 2.70 0.22 1.43 0.24 1.65
24 September 2014 −17.26 −2.95 0.24 0.77 −0.18 −1.06 −0.19 −1.12
Fixed Line Telecommunications 11 July 2006 −20.93 −3.56 0.07 1.73 −0.22 −1.98 −0.22 −2.04
19 February 2018 11.84 3.65 0.02 2.59 0.23 2.90 0.22 2.83
J. Risk Financial Manag. 2019, 12, 175 14 of 19

Information on environmental regulations and carbon tax legislation may be leaked or the
market may anticipate the news before it is released officially. This section differentiates our study
from previous studies in the literature whereby we examine the possible market anticipation of
environmental regulations. The alternative energy sector, for instance, recorded the highest positive
cumulative abnormal return of 126.09% (with a t-statistic of 2.77) five days before the carbon pricing
bill was passed in Parliament on 20 March 2018. This result indicates that green sectors applying
nature-friendly technology may produce positive abnormal returns as their rewards. In support of the
market anticipation hypothesis, we find that eight sectors (including automobiles and parts; electrical
equipment and services; forestry and papers; general retailers; industrial engineering; personal goods;
fixed line telecommunication; and travel and leisure) experienced positive CARs five days before
announcement 8 on 20 February 2017. For example, the automobiles and parts sector and the electrical
equipment and services sector experienced positive CAR(−5)s of 6.44% (with a t-statistic of 2.42) and
5.96% (with a t-statistic of 2.30), respectively. A possible explanation of these favourable outcomes is
that these sectors follow the trend to produce eco-friendly recycled and bio-based parts.
Due to conservatism bias, it is important to capture the late reaction of sectors to the same
information by calculating the cumulative abnormal returns 5 days after the event date. The sector
of food and drug retailers is a good example when market participants hold the same reaction on
the first day and five days after news arrival. We find that abnormal return is 1.17% with a t-statistic
of 2.07 in Table 2, while the cumulative abnormal return is 2.73% with a t-statistic of 2.12 in Table 4,
following announcement 9. In addition, the electricity sector did not react in terms of abnormal returns,
but this sector experienced a negative cumulative abnormal return of −17.26% with a t-statistic of
−2.95 five days after Singapore ratified the Doha Amendment (announcement 4) and this result is
consistent with the findings of Pham et al. (2019a) wherein the negative delayed reaction of electricity
sector is evident in France. Five days later (on 19 February 2018), following the announcement of
Finance Minister Heng Swee Keat regarding the amount of money to be charged for greenhouse gas
emissions, the industrial metals and mining sector and the personal goods and home construction
sector exhibited negative CAR5s of −6.88% (with a t-statistic of −2.26) and −8.36% (with a t-statistic
of −2.87), respectively. Thus, the results show that environmental regulation has been successful in
targeting some of the biggest polluters.

4.6. The Diamond Risk Structure

Another issue that requires an investigation is the effects of environmental regulation on risk.
To address this issue, we study the effects of environmental regulation on the short-term and long-term
systematic risk of 37 sectors. Equations (5) and (6) are estimated to capture changes in short-term
systematic risk. These two equations are adjusted to obtain the long-term version that is used to capture
changes in long-term systematic risk. We hypothesise that the risk of polluters rises (falls) with stringent
(lax) environmental regulation and vice versa for the risk of environmentally-friendly businesses.
Table 5 presents the aggregate change in systematic risk following the announcements of
environmental policies. The results show that only the media sector and the pharmaceuticals and
biotechnology sector were affected by the announcements. The media sector experienced an overall
decline in systematic risk (−2.2 with a t-statistic of −2.77) whereas pharmaceuticals and biotechnology
had an overall increase in systematic risk (2.94 with a t-statistic of 25.7). Most sectors did not experience
an aggregate change in systematic risk since the outcomes of each event may cancel each other.
Therefore, Equation (6) is used to examine short-term changes in systematic risk following each
individual event.
J. Risk Financial Manag. 2019, 12, 175 15 of 19

Table 5. Aggregate change in systematic risk.

Sector Intercept t-Stat Beta t-Stat Change in Beta t-Stat

Aerospace and Defense 0 −1.29 0.84 57.28 0.26 0.74
Alternative Energy 0 −0.43 0.68 11 −0.16 0.00
Automobiles and Parts 0 −1.59 0.89 79.63 −0.25 −0.22
Banks 0 −3.92 0.88 195.88 0.05 0.09
Beverages 0 0.43 0.93 49.37 −0.27 −0.25
Chemicals 0 −0.38 0.87 79.12 0.27 0.29
Construction and Materials 0 −0.24 0.82 49.39 0.18 0.16
Electrical Equipment and Services 0 −1.71 0.85 97.68 −0.1 −0.09
Electricity 0 0.04 −0.55 −33.41 5.04 0.68
Financial Services 0 −0.21 0.78 62.57 0.22 0.21
Food and Drugs Retailers 0 −0.01 0.81 41.77 0.09 0.05
Food Producers 0 −3.29 0.96 127.65 0.00 −0.01
Forestry and Papers 0 −1.44 0.9 60.39 −0.23 −0.14
Gas, Water and Multiutilities 0 −1.71 0.98 125.04 −0.02 −0.04
General Industrials 0 0.27 0.96 105.16 0.23 0.12
General Retailers 0 −2.79 0.94 122.29 −0.15 −0.12
Healthcare Equipment and Services 0 −1.16 0.95 97.7 −0.16 −0.30
Household Goods and Home Construction 0 −2.62 0.93 80.15 −0.22 −0.26
Industrial Engineering 0 −4.44 0.95 160.08 −0.07 −0.20
Industrial Metals and Mining 0 −2.55 0.94 94.28 −0.78 −0.69
Industrial Transportation 0 −3.78 0.96 118.96 0.11 0.13
Leisure Goods 0 −2.78 0.95 60 −0.24 −0.07
Life Insurance 0 −0.4 0.93 128.09 −0.16 −1.43
Media 0 −3.77 0.95 63.18 −2.2 −2.77
Mining 0 −3.1 0.96 63.99 −0.07 −0.02
Mobile Telecommunication 0 −0.01 0.98 165.98 −0.27 −1.54
Nonlife Insurance 0 0.98 0.87 71.36 0.10 0.07
Oil Equipment 0 −2.48 0.97 129.17 −0.06 −0.07
Oil and Gas Producers 0 −6.98 1.1 109.81 −0.19 −0.08
Personal Goods 0 −3.22 0.95 85.55 0.00 0.00
Pharmaceuticals and Biotechnology 0 −1.33 0.9 63.6 2.94 25.7
Real Estate Investment Services 0 −2.47 0.98 205.83 −0.19 −0.41
Real Estate Investment Trust 0 0.84 0.98 212.35 −0.03 −0.12
Software 0 −3.97 0.98 68.48 0.44 0.28
Support Services 0 −1.17 0.91 42.04 0.21 0.07
Technology Hardware and Equipment 0 −3.92 0.95 99.12 0.12 0.16
Fixed Line Telecommunications 0 −1.6 0.94 66.93 0.22 0.21
Travel and Leisure 0 −1.44 0.94 129.93 −0.01 −0.02
Unclassified 0 −3.11 0.98 77.91 −0.14 −0.09

We find that Singapore’s ratification of major international environmental deals, including the
Kyoto Protocol (event 1) and the Paris Agreement (event 7), led to a diamond risk phenomenon
(Figure 1). The result is consistent with that of Pham et al. (2019a, 2019b) wherein the authors
found similar evidence in France and Germany. In addition, our results show that the environmental
regulation tends to have a negative effect as many sectors experienced an increase in short-term
systematic risk when the carbon pricing bill was passed by Parliament on 20 March 2018 (event 10).
Another interesting finding is that the alternative energy sector seems to be well-supported in Singapore
as it experienced a significant decline in short-term systematic risk following the ratification of the Paris
Agreement (event 6) and carbon tax announcements (events 8, 9, and 10). However, the effect on the
alternative energy sector proved to be short-lived as we find evidence indicating that environmental
regulation results in a relatively normal state of long-term systematic risk as the net outcome (Figure 2).
The results also indicate that several sectors experienced an increase in both short-term and long-term
systematic risk when the carbon pricing bill was passed in event 10 (Figures 1 and 2).
ratification of the Paris Agreement (event 6) and carbon tax announcements (events 8, 9, and 10).
However, the effect on the alternative energy sector proved to be short-lived as we find evidence
indicating that environmental regulation results in a relatively normal state of long-term systematic
risk as the net outcome (Figure 2). The results also indicate that several sectors experienced an
increase in both short-term and long-term systematic risk when the carbon pricing bill was passed in
J. Risk Financial Manag. 2019, 12, 175 16 of 19
event 10 (Figures 1 and 2).

J. Risk Financial Manag. 2018, 6, x 17 of 20

Figure
Figure 1. Short-term changes
1. Short-term changes in
in systematic
systematic risk.
risk.

Figure 2. Long-term
Figure 2. Long-term changes
changes in
in systematic
systematic risk.
risk.
5. Conclusions
5. Conclusions
The introduction of the carbon tax in Singapore is intended to combat climate change and global
The introduction of the carbon tax in Singapore is intended to combat climate change and global
warming. This piece of environmental regulation is based on the use of carbon pricing to reduce
warming. This piece of environmental regulation is based on the use of carbon pricing to reduce
carbon emissions by making firms more resource-efficient and engaging in sustainable activities.
carbon emissions by making firms more resource-efficient and engaging in sustainable activities. It
It is also intended to create more opportunities for the growth and development of green and
is also intended to create more opportunities for the growth and development of green and
environmentally-friendly sectors. Moreover, the Singapore government aims at enhancing awareness
environmentally-friendly sectors. Moreover, the Singapore government aims at enhancing awareness
of environmental protection by encouraging consumers to use less electricity and shift to more
of environmental protection by encouraging consumers to use less electricity and shift to more
energy-efficient products.
energy-efficient products.
Overall, our results confirm the effects of environmental regulations on both polluting and
Overall, our results confirm the effects of environmental regulations on both polluting and
environmentally-friendly sectors and indicate that the carbon tax is accomplishing its desired effects
environmentally-friendly sectors and indicate that the carbon tax is accomplishing its desired effects
in Singapore. We also find evidence showing that several big polluters (including the industrial
in Singapore. We also find evidence showing that several big polluters (including the industrial
metals and mining sector, the forestry and papers sector, and the electrical equipment and services
metals and mining sector, the forestry and papers sector, and the electrical equipment and services
sector) attained negative abnormal returns around the announcement of the carbon tax. Although the
sector) attained negative abnormal returns around the announcement of the carbon tax. Although the
electricity industry had no reaction on the first day of any event, we observe an unfavourable result
electricity industry had no reaction on the first day of any event, we observe an unfavourable result
five days following the news, which means environmental regulations show a certain degree of
impact on polluting sectors and achieve their objectives. Moreover, the alternative energy industry
(focusing on new renewable energy technologies) experienced a sizeable positive cumulative
abnormal return five days before the arrival of the news that the carbon pricing bill was passed by
Parliament as well as a significant decline in short-term systematic risk in certain events. Originally,
J. Risk Financial Manag. 2019, 12, 175 17 of 19

five days following the news, which means environmental regulations show a certain degree of impact
on polluting sectors and achieve their objectives. Moreover, the alternative energy industry (focusing
on new renewable energy technologies) experienced a sizeable positive cumulative abnormal return
five days before the arrival of the news that the carbon pricing bill was passed by Parliament as well
as a significant decline in short-term systematic risk in certain events. Originally, the carbon tax was
expected to come into force in 2019 as announced in 2017. However, the Singaporean government
seemed to acknowledge the failure of the carbon tax from Australia and hence they postponed it to 2020,
which could be considered as an act of policy refinement. As a result, the Singapore carbon tax seems
to achieve its targets by affecting the polluting sectors negatively and environmentally-friendly sectors
positively. These results provide a significant implication for policymakers of the countries planning to
introduce a carbon tax. Unlike an emission trading scheme where the price of emission is determined
by market forces, the policymakers need to carefully consider the price level of the carbon tax so that
it would not be overwhelming to polluting firms that might eventually drive them out of business.
From the investor perspective, they could take advantage of upcoming environmental regulations in
the countries that have similar settings to those of Singapore by investing in environmentally-friendly
businesses, as these businesses tend to exhibit positive abnormal returns when the environmental
regulations or carbon tax are introduced. The results of this study are, however, limited to the Singapore
stock market and hence, more studies should be conducted to fully understand the effects of carbon
tax on the stock markets and examine if the findings are conclusive.

Author Contributions: H.P. contributed to every aspect of the article including conceptualisation, data analysis,
writing and polishing. V.N. mostly dealt with data analysis. P.M. helped with the literature review and writing the
empirical results. V.R. and I.M. improved the introduction, literature review, shaped up and improved the paper.
Funding: This research received no external funding.
Conflicts of Interest: The authors declare no conflicts of interest.

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