The Capital Market Implications of Climate Risk Disclosure

Abstract

Corporate climate risk (CR) disclosures have become increasingly widespread in recent years. Using a theoretical framework, we hypothesize that increased CR disclosure allows a firm to appeal to a larger set of institutional investors, and that this, in turn, implies an increased supply of lendable shares, less binding short-selling constraints, and improved market quality. We consider a difference-in-differences setting to test our implications, using the publication of the SEC (2010) guidance on CR disclosure as our DiD event.   We find empirical evidence consistent with all of our hypotheses. Our study identifies CR disclosures as a novel source of ownership breadth, and, ultimately, financial market liquidity and efficiency. We find supporting evidence for belief heterogeneity as a mediating variable for the impact of CR disclosure on market quality. We also show that socially responsible mutual funds are particularly important in channeling CR disclosures' positive effects on financial 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