Investor Perceptions of Climate Policy: Insights From the US Inflation Reduction Act

ABSTRACT This paper provides the first event study evidence on how the Inflation Reduction Act's (IRA) dedicated climate provisions reshaped equity valuations in the US carbon‐intensive sectors. Focusing on environmentally sensitive industries (ESI), we analyze cumulative abnormal returns around the four key IRA milestones in 2022–2023. Using the IRA setting allows us to sidestep the bias arising from external ESG ratings or companies' ESG‐related disclosures. Drawing on the Efficient Market Hypothesis, we find a significant positive market reaction immediately after the Senate's approval. This reaction is concentrated among large firms, firms with extensive analyst coverage, and those operating in less competitive markets. We demonstrate that investor responses are heightened in Democratic‐controlled states compared with Republican‐leaning states. Our results are robust to several robustness checks, placebo dates, ex‐dividend returns, and propensity score matching. Our results suggest that investors' positive reactions may be driven by expectations that IRA subsidies can mitigate the cost implications of sustainability and thereby limit the negative impact on firms' financial performance. Our insights inform investment professionals on investor perceptions of climate provisions and policymakers on how climate legislation affects financial markets.