Carbon Liquidity

Abstract

We study the impact of disclosing greenhouse gas emissions (CO2) on the liquidity of firms’ equity. For the subset of firms that report emissions, we find that higher emissions lead to lower liquidity. However, firms that do disclose emissions have lower bid-ask spreads than firms that do not. This is because these firms are more liquid before disclosing emissions but also because when firms first disclose emissions bid-ask spreads decrease by roughly 13%. These results hold for high information asymmetry firms, for high and low carbon intensity firms, and for early and late disclosing firms. Our results are consistent with theory that shows that more information asymmetry leads to lower liquidity and suggests that intermediaries also care about the CO2 emissions of firms.

Keywords: Greenhouse gas emissions, liquidity, disclosure

JEL Classification: G12, G14, Q54