Firm-Level Climate Sentiments, Climate Politics and Implied Cost of Equity Capital

Abstract

In a sample of U.S. firms, we find strong evidence that firms’ implied cost of equity is decreasing in a novel proxy of firm-level climate change sentiments of earnings call participants, supporting prior literature that investors demand higher returns from their investments in firms carrying brown perceptions and lower returns from those with green perceptions. This effect, however, is particularly pronounced for the firm-years headquartered in the states experiencing higher than median per-capital energy related CO2 emissions and those headquartered in RED states, supporting “boomerang hypothesis” that green firms are hedged against potential changes in local climate standards and thus enjoy considerably cheaper financing in the states marred with greenhouse gas emission concerns and climate unfriendly political environment. We utilize the variation in regionwide public opinion about scientists’ beliefs regarding the occurrence of global warming as an instrument to address endogeneity issues.

Keywords: Implied cost of equity, Climate Sentiments, Earnings Conference Calls