Regulatory shocks and supply chain heterogeneity: stock market reactions to the EU deforestation regulation on the Indonesian stock exchange

Abstract

This study examines how EU Deforestation Regulation (EUDR) regulatory events affected abnormal equity returns of Indonesian Stock Exchange (IDX) firms and whether supply chain position, physical risk exposure and certification moderated the response. An event study covers six EUDR announcements (2023–2025), including adoption, entry into force and implementation delays. We estimate cumulative abnormal returns (CARs) using a market model with a 221-day pre-event window and test them with BMP, sign and Corrado rank statistics. Cross-sectional regressions relate CARs to supply chain tier, a composite physical risk score and Roundtable on Sustainable Palm Oil (RSPO)/Indonesian Sustainable Palm Oil (ISPO) certification. Robustness checks use a multifactor model (CPO and IDR/EUR) and a wild cluster bootstrap. Tier 1 upstream producers experienced a significant CAAR of −3.80% over [−5, +5] at EUDR adoption, robust across specifications. Reactions to later delay events differed: Tier 1 gained 2.25% at the delay proposal but recorded losses when the delay was formally adopted. Physical risk is positively associated with CARs at the delay proposal, although the relationship weakens under a cross-sectional dependence diagnostic. RSPO-certified firms show a return differential at the second revision, but significance disappears after adding firm controls. Given the small sample (N = 75; Tier 1 N = 17), these results should be interpreted cautiously. The study extends resource dependence theory by showing that resource-dependent upstream firms bear a disproportionate share of a foreign regulatory shock. It provides the first supply-country equity event study of a major biodiversity regulation and introduces supply chain tier and certification as dimensions of corporate biodiversity risk.