The Capital Market Implications of Climate Risk Disclosure

Abstract

Corporate climate risk (CR) disclosures have become increasingly widespread in recent years.  We propose theoretically that increased CR disclosure allows a firm to appeal to more institutional investors, which implies eased shorting constraints and improved market quality. We find evidence supporting our hypotheses for a set of firms that significantly increased their CR disclosures around the publication of the SEC (2010) guidance on disclosing CR.  Our study identifies CR disclosures as a novel source of ownership dispersion, liquidity, and market efficiency. We show that belief heterogeneity and socially responsible funds are important in channeling CR disclosures' positive effects on markets.

Keywords: Climate risk, Disclosure, Breadth of ownership, Stock liquidity, Price efficiency JEL: G14, G20, G30, Q54 Climate risk, Disclosure, Breadth of ownership, Stock liquidity, Price efficiency JEL: G14, G20, G30, Q54