Polluters are Short-Lived: Climate Risk and the Timing of Cash Flows

Abstract

I construct a measure of cash flow duration at the firm level and link it to carbon emissions of the same firm. Firms that generate their cash flows in the near term emit more carbon, reflecting that short-term cash flows are relatively less exposed to regulatory climate risks. This relationship leads to high correlations of emission and duration premiums. Return differences are driven by emissions instead of duration and disappear after controlling for changes in investors' climate concerns. These changes, together with the novel link between duration and emissions, provide an intuitive empirical explanation for the recent underperformance of value.

Keywords: Duration, carbon emissions, climate change, cross-section of stock returns,

JEL Classification: G10, G12, G18, Q50