Political elections and market reactions: The ‘Trump effect’ on green stocks

Financial and non-financial companies are increasingly involved in reducing their environmental impact, driven by a growing sensitivity to climate change, policy and intergovernmental initiatives, and domestic political structures.

Social and environmental initiatives often gain importance when they align with elected officials’ priorities, whose policies can alter markets’ behavior. In particular, Presidential elections may prompt investors to rationally adjust their portfolio choices, purchasing shares of companies likely to benefit from the winning party's future policies while selling shares of companies that may face challenges.

The literature and public opinion recognize that left- and right-wing parties typically adopt different approaches to environmental issues, with the former prioritizing environmental protection. 

The election of Donald Trump as the 45th president of the United States and his sceptical positions on climate threaten the fight against climate change, potentially weakening investors’ green concerns.

Through an event study approach, the paper aims to analyze the reaction of the U.S. stock market to the latest presidential election, exploring the investors’ reactions across sectors.

We find a strong heterogeneous reaction across sectors. Moreover, we show that the worst performance in the short period is attributable to companies with better performance on environmental issues, which could mean an adjustment of investors’ assessment criteria in anticipation of President Trump's anti-climate policies, reduced transition risk for "brown" firms and lower benefits for firms excelling in environmental performance.

Read the full article.

The Authors at the Department of Management: Simona Cosma