Firm-Specific Climate Risk and Market Valuation
56 Pages Posted: 5 May 2016 Last revised: 3 Jun 2019
Date Written: May 25, 2019
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.
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