Shareholder value effects of corporate carbon trading: Empirical evidence from market reaction towards Clean Development Mechanism in China

Are shareholders sensitive to corporate initiative of implementing Clean Development Mechanism (CDM) projects? And if so, what are the key factors that influence the corresponding abnormal return to enterprises? To answer these questions, we employed an event study methodology to evaluate the stock market reaction to the CDM projects certification in China since 2005. We illuminated three sources of ambiguity in the relationship between corporate CDM initiatives and shareholder value, namely the impacts from time, CDM types, and credits of carbon emission reduction (CER). Our empirical results showed that the CDM initiatives could benefit corporate shareholder values. The expected CER credit is the main driver for the increase in shareholder value. However, we also found that the positive shareholder value effect of CDM decreases over time. In particular, industrial gas CDM projects rather than renewable energy and energy efficiency projects are preferred by shareholders; but there are no significant differences in the shareholder value effect between bilateral contracting and unilateral implementation. This paper advanced knowledge on the shareholder value effect of corporate CDM initiatives, and more generally, the impact of corporate carbon trading on financial performance of enterprises in an emerging country context.