Biodiversity Risk, Firm Performance, and Market Mispricing
52 Pages Posted: 15 Apr 2024 Last revised: 15 Nov 2024
Date Written: February 1, 2024
Abstract
Combining new data on biodiversity-capacity and biodiversity-footprint with firm fundamentals, we conduct a causal analysis of the impact of biodiversity physical risk on firms' profitability and stock returns. With this purpose, we build a biodiversity index for 35 countries and use a time series model to capture its variation over time. We show that such time trend estimation can be aggregated as risk exposure and can significantly forecast establishment-level profitability. We then show that the market underprices biodiversity physical risk, which is due to the insufficient analysis of related information and its impact on the firm-level future cash flow. We also document disparities of risk exposure across firms and sectors, and our results are consistent with previous findings in terms of climate physical risk.
Keywords: Biodiversity, physical risk, profitability, stock returns, market effeciency
JEL Classification: G1, G12, G14, Q57
Suggested Citation: Suggested Citation