4.3 Carbon Intensity effect on Financial Performance: Impulse Response Function Analysis in Short Panel vector autoregressions
4.3.2 Carbon Intensity effect on Market-Based Measures: Impulse Response Function Analysis
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Figure 4.IV: Response of ROS to Shocks in EMSINT
4.3.2 Carbon Intensity effect on Market-Based Measures: Impulse Response
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measure carbon output intensity (EMSINT), Figure 4.VI shows an obvious positive response of EQRTNS in year 1, and subsequent negative response from year 2 through to year 7, after which EQRTNS starts to revert to the equilibrium point, with year 2 showing the highest negative response. When the impulse is from LNMVE, Appendix XV shows an obvious negative response of EQRTNS from year 2 through year 6, and smooth positive response from the end of year 6 to the eighth year. When LEV is the impulse, EQRTNS exhibits an obvious positive response from period up to period 5, and subsequent smooth positive response to year 8 (Appendix XIII). When the impulse is OPTINC, EQRTNS tends to show a smooth positive response in year 1, and an obvious negative fluctuating in year 2, with a subsequent positive response from year 3 through year 8 (Appendix XVI). When the impulse is GROWTH, EQRTNS exhibits a positive response up to year 3, obvious negative response in year 4, with some smooth tendencies from year 5 through year 8 ( Appendix XVI)
Figure 4.V: Response of EQRTNS to Shocks in LnENGINT
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Figure 4.VI: Response of EQRTNS to Shocks in LnEMSINT
Figure 4.VII shows that when the shock is from the sustainability measure carbon input intensity (ENGINT), MVE/S is able to sustain the shocks from year 1 to year 4, after which a minimal positive and a negative impact are registered up to the eighth year. Figure 4.VIII similarly indicates that when the impulse is sustainability measure carbon output intensity (EMSINT), MVE/S is able to sustain shocks at each time responsive period. When the impulse is from ASSETS/S, there is a minimal response from MVE/S from year 1 through year 3, but subsequently shows obvious positive responses at each time responsive period from year 4 to year 8, with the highest positive response in year 8 (Appendix XX). When the impulse is LEV, a minimal effect of LEV is found on MVE/S from year 1 through to year 6, but subsequently shows obvious positive and negative responses from year 6 throug year 8 (Appendix XVIII). When the impulse is GROWTH, effects of shocks are minimal from year 1 to year 3, with subsequent obvious positive and negative effects from year 4 to year 8.
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Figure 4.VII: Response of MVE/S to Shocks in ENGINT
Figure 4.VIII: Response of MVE/S to Shocks in EMSINT
Discussion:
IRF analysis in SPVARs shows that on average ROA tends to respond negatively to shocks in carbon input intensity for the first 4 years of the shocks, after which it exhibits mean reversion tendencies. The response indicates that shocks in carbon
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input intensity is value destroying and does not enhance firms’ competitiveness with respect to ROA. The study also found that shocks from carbon input intensity persist for 4 years before reversion to equilibrium starts. On the contrary, response of ROA to shocks in carbon output intensity indicates that on average shocks from sustainability measures carbon output intensity (EMSINT) are value driven and tend to enhance firms’ competitiveness. With respect to the carbon input intensity effect on return on sales (ROS), the results show a negative effect of ROS to shocks in carbon output intensity which persist for more than 7 years; indicating a value destroying effect and non-competitiveness of firms of shocks in carbon input intensity. With regards to the response of EQRTNS to shocks in carbon input intensity, the results show that shocks in carbon input intensity enhances firms’
competitiveness relative to EQRTNS only in year 1, and tend to respond negatively from year 2 through to year 6, before reverting to the equilibrium point. The results show that shocks in carbon input intensity persist for 5 years before EQRTNS begins to move towards stability, an indication of value destroying and poor returns to equity-holders. On the carbon output intensity effect on EQRTNS, the results show that on average EQRTNS tends to respond negatively to shocks in carbon output intensity and persist for 7 years then tends to regain stability. This result equally shows that shocks in carbon output intensity is value destroying and does not enhance corporate competitiveness. On carbon input intensity relations with MVE/S, the results reveal that MVE/S has the ability to sustain and maintain shocks from carbon input intensity for 4 years, and subsequently exhibited unobserved/ minimal intermittent positive and negative tendencies toward stability.
With respect to carbon output intensity (EMSINT) relative to MVE/S, the results show that MVE/S exhibited the tendency to absolve the shocks from EMSINT.
In conclusion the results indicate that on average shocks in carbon output intensity (EMSINT) tend to pay financially in the first 6 years with respect to ROA, with the highest gain in year 2. With respect to ROS the gain is seen in the first 2 years, EQRTNS sees gain only in the first year, with MVE/S exhibiting stability tendencies
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till the last period. On the contrary, shocks in carbon input intensity (ENGINT) tend to cause a decrease in ROA in the first 4 years, with ROS showing decreasing tendencies throughout the periods. EQRTNS similarly showed a decreasing trend for the first 6 years, and MVE/S exhibiting stability in the 4 years.
4. 4 Carbon Intensity effect on Financial Performance Measures: Dynamic Panel Threshold estimation
Carbon intensity as referred to in the preceding sections refers to a firm’s physical carbon performance and describes the extent to which firms’ business activities are based on carbon related energy usage (carbon input intensity) and emissions (carbon output intensity) for a defined scope in a fiscal year (Hoffmann and Busch, 2008).
4.4.1 Carbon Intensity effect on Accounting-Based Measures: Dynamic Panel