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 the firm to attract a broader set of institutional investors. This increase in investor base relaxes shorting constraints and improves liquidity as well as price efficiency. Evidence supports these implications for firms that significantly  increased CR disclosures around publication of the SEC (2010) reporting guidance for CR. Thus, we identify CR disclosures as a novel source of ownership dispersion and market quality. 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