Proximity Peril: The Effects of Neighboring Firms' Biodiversity Risk on Firm Value

Abstract

Since geographically proximate firms operate in local biosphere and rely on common ecosystem services, a focal firm value might be affected by proximate firms' biodiversity risk. We construct a new measure of biodiversity risk by considering biodiversity disclosure in 10-K files and geographical distance. We find that onestandard-deviation increase in neighboring firm's biodiversity risk measure is associated with about 3.78% decline in the corresponding focal firm's value on average. Using the Deepwater Horizon oil spill in 2010 as an exogenous shock, we establish a causal relationship. By decomposing Tobin's Q, we find that proximate firm's biodiversity risk leads to significant declines in sector-wide and long-run value components. Further analysis shows that the negative effects are more pronounced in industries with high biodiversity risk or when firms are connected through supply chains. Our findings underscore the importance of the geographical interconnectedness of biodiversity risks and its implications for corporate value.

Keywords: Biodiversity risk, Firm value, Geographical proximity, Supply chain