Navigating the green wave: Urban climate adaptation and firms' investment decisions-evidence from China

Climate mitigation and climate adaptation are the two main pillars of climate governance; however, the existing literature has primarily focused on climate mitigation, with relatively little scholarly attention devoted to urban climate adaptation. Our research will fill this research gap by exploring impacts of urban climate adaptation on firms' investment decisions. Regarding the 2017 China's climate adaptation pilot cities (CAPC) policy as a quasi-natural experiment and employing the difference-in-differences (DID) method, we investigate whether and how urban climate adaptation from CAPC policy affects firms' investment decisions based on A-share listed firms. Our findings indicate that urban climate adaptation has significantly enhanced firms' investment by 14.18 %. This effect can be attributed to the reduction of firms' bankruptcy risk and increased optimism in analysts' earnings forecasts, rather than the alleviation of financial constraints. Additionally, our paper finds that impacts of urban climate adaptation on firms' investment decisions are more prominent for non-state-owned enterprises (NSOEs), firms in the growth stage, and those situated in cities with high climate risk perception. These findings enhance understanding about the role of urban climate adaptation in shaping firms' investment behaviors in developing countries and provide critical insights for the formulation of effective climate governance policies.