Climate Change and Corporate Investment Decisions

Abstract

We document that climate uncertainty negatively affects corporate investment. The effect is more pronounced for firms with higher capital intensity, higher operating inflexibility, and less redeployable capital. Our results are robust to using an instrumental variable approach and to using alternative measures. Further, we find that climate adaptation policy mitigates the negative effects of climate uncertainty on corporate investment. We establish this result using the staggered introduction of state-led climate change adaptation policy across U.S. states. Our findings suggest that climate uncertainty can depress corporate investment, but climate adaptation policies shield firms from climate uncertainty contributing to investment resilience.

Keywords: climate uncertainty, climate change, transition policy, corporate investment, climate adaptation, climate change news index, climate resilience, investment irreversibility

JEL Classification: G15, G32, G38, Q54