Does Biodiversity Risk Matter to Capital Markets? New Evidence from China

Abstract

This paper presents novel macro-, meso-, and firm-level measures of biodiversity risk exposure specific to the Chinese capital market, and investigates how these levels of biodiversity risk relate to individual stock returns. We find that biodiversity risk varies over time and across industries, and that aggregate attention to biodiversity issues has risen sharply over the past two decades. Using cross-sectional models of stock returns, we then provide new evidence that corporate biodiversity risk exposure negatively relates to stock returns, significantly more so when aggregate attention to biodiversity issues rises and industry-level biodiversity risk increases. Our documentation of important interactions between firm-level and aggregate (industry) level biodiversity risks in explaining stock returns is consistent with recent evidence that environmental and biodiversity risk premiums, while being potentially positive in the long run, might be negative in the short run. In addition, institutional ownership, in particular shareholdings of banks and funds are lower when firms appear more vulnerable to biodiversity risk.

Keywords: Biodiversity risk, stock returns, official news, investor perception, internal governance, external monitoring JEL codes: G10, G11, G12, Q5, Q53, Q57