US capital market consequences of the Brussels Effect: evidence from sustainability reporting
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Abstract
This paper examines the equity market pricing of regulatory risk associated with the Brussels Effect—theoretical expectations that European Union regulations exert extraterritorial influence (Bradford, 2020). Specifically, I assess the risk-driven short window market reaction of US firms exposed to the Corporate Sustainability Reporting Directive (CSRD). I document significantly negative abnormal returns to key events leading to CSRD passage, driven by increases in discount rates (reflected in both increased return volatility and decreased call-put skewness). These effects occur for US firms directly exposed to CSRD requirements (i.e., having European subsidiaries exceeding its reporting thresholds), as well as for US firms indirectly exposed (i.e., having European subsidiaries below reporting thresholds). Further, the observed negative market effects are accentuated for firms’ exhibiting high green-house gas emissions. Consistently, I also find reduced uncertainty of risk, reflected in lowered variance risk premia and delta implied volatility. Collectively, these findings are consistent with investors pricing increased regulatory risk associated with US firms’ exposure to the Brussels Effect.
Description
2026