How does the capital market respond to policy shocks? Evidence from listed solar photovoltaic companies in China

Subsidies and policy support are critical for the development of renewable energy industries such as solar photovoltaics (PV). One of the most important policy instruments for supporting renewable energy development is the feed-in tariff (FIT), which is intended to have a significant, facilitating impact on the steady development of the PV industry. The questions are how strong market reactions are to FIT policies and what forms of policies are more effective. To investigate these questions, this paper uses an event study approach and pays special attention to the responses of the capital market. The empirical results show that the stock returns of listed PV companies in China respond significantly to FIT policies. The capital market responses of these policy shocks differ significantly over time and across companies. Manufacturing companies and companies receiving large subsidies are more sensitive to policy shocks. Given the importance of equity financing to the renewable energy industry, policymakers should take into account the potential uncertainties in the sector that are caused by policy changes.

Automated summary

Subsidies and policy support play a critical role in the development of renewable energy industries, with feed-in tariff policies being particularly important for the steady growth of the solar photovoltaic industry. Market reactions to these policies vary significantly, with manufacturing companies and those receiving substantial subsidies being more sensitive to policy shocks. Policymakers should take into consideration the potential uncertainties in the sector caused by policy changes, given the importance of equity financing in the renewable energy industry.