Firm-Specific Climate Risk and Market Valuation

56 Pages Posted: 5 May 2016 Last revised: 3 Jun 2019

See all articles by Henk Berkman

Henk Berkman

University of Auckland - Business School

Jonathan Jona

Tulane University, A.B. Freeman School of Business, Finance & Economics, Students

Naomi S. Soderstrom

University of Melbourne

Date Written: May 25, 2019

Abstract

We explore usefulness of a measure based on 10-K disclosures of firm-specific climate risk exposure. We find that our measure is negatively associated with firm value and positively associated with implied cost of capital and beta. Climate risk disclosure tone is significantly associated with firm value, but does not subsume our measure. Results are robust to self-selection bias, disclosure characteristics of other 10-K portions, and measures of environmental performance. In an examination of extreme weather-related events that likely increased the perceived relevance of climate risks, we find significantly negative returns to a hedge portfolio that is long (short) on firms with high (low) levels of climate risk. This result does not obtain for carbon emissions as a measure of climate risk. We conclude that our measure provides incremental explanatory power over measures of climate risk currently used in the literature.

Keywords: Climate Risk, Market Valuation, Event Study, textual analysis, disclosure.

Suggested Citation

Berkman, Henk and Jona, Jonathan and Soderstrom, Naomi S., Firm-Specific Climate Risk and Market Valuation (May 25, 2019). Available at SSRN: https://ssrn.com/abstract=2775552 or http://dx.doi.org/10.2139/ssrn.2775552

Henk Berkman

University of Auckland - Business School ( email )

Private Bag 92019
Room: 577
Auckland
New Zealand
(64 9) 3737599 Ext. 7181 (Phone)
(64 9) 3737406 (Fax)

Jonathan Jona

Tulane University, A.B. Freeman School of Business, Finance & Economics, Students ( email )

7 McAlister Drive
New Orleans, LA
United States

Naomi S. Soderstrom (Contact Author)

University of Melbourne ( email )

Victoria
Melbourne, 3010
Australia

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