The Equity Market Response to Climate Change Litigation

Abstract

We document a significant decline in defendants' stock prices after the filing of litigation cases on climate change issues against them in the US. Economically, we document a 0.5% decline on the filing day and a 2.7% cumulative abnormal decline in the eight days following the filing. Cross-sectional analysis shows that the negative response is more pronounced in firms with greater external financial constraints, higher cash flow volatility, and lower environment, social, and governance ratings. The difference-in-differences analysis shows a decline in responsible institutional ownership and an increase in corporate reputation risk after a climate change litigation is filed.

Keywords: Climate change litigation, Equity returns, Responsible institutional ownership, Corporate reputation risk