The impact of firm-level greenness on the transmission of monetary policy shocks to stock market prices in Sweden

Sammanfattning: A growing literature has indicated that monetary policy shocks impact the stock prices of brown firms more strongly than the stock prices of green firms. Monetary policy tightening is associated with lower stock prices since it leads to a higher cost of capital and in turn a higher discount rate for the expected stream of cash flows. Therefore, if the stock prices for brown firms drop more, relative to that of green firms, then brown firm's cost of capital is more sensitive to the decisions of central banks. Moreover, recent studies have shown that if the cost of capital for brown firms increases relative to green firms, the former tends to become less environmentally friendly, as they are unable to make the long-term investment to become greener, while the latter's environmental performance is unaffected. Therefore, if the stock prices of brown firms are more sensitive to monetary policy than those of green firms, then the elevated interest rates we currently see around the globe might have a more negative impact on the green transition than previously thought. In light of this, we first investigate the effect of monetary policy shocks on the Swedish stock market. We use high-frequency data to identify the impact of stock prices on policy shocks. We find that an unexpected 1 percentage point increase in Sveriges Riksbank's repo rate translates into a 3.5% decrease in daily stock returns. To examine if there is a heterogeneous impact of monetary policy on the stock prices of green and brown firms, we use a panel data event study methodology. In contrast to previous studies done in a US setting, we find that the environmental performance of a firm does not impact the effect monetary policy shocks have on its stock price.