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Do Chinese carbon-intensive stocks overreact to climate transition risk? Evidence from the COP26 news

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  • Ge, Xiaowen
  • Xue, Minggao
  • Cao, Ruiyi

Abstract

We exploit an exogenous event—the 26th United Nations Climate Change Conference of the Parties (COP26)—and a short-term event study method to examine whether Chinese stock markets overreact to climate transition risk. The results show that retail investors overreact to COP26 news by depressing the current prices of carbon-intensive stocks below their fundamental values, leading to higher subsequent returns. Institutional investors and corporate insiders implement contrarian trading strategies to reduce the deviations of stock prices from their fundamentals. Our results are consistent with the “salience bias” hypothesis. In addition, carbon-intensive stocks with higher environmental, social, and governance (ESG) composite scores face greater selling pressure due to suspicions of greenwashing. Our findings contribute to understanding the impact of investor structure and behavioural patterns on the pricing efficiency of climate risk.

Suggested Citation

  • Ge, Xiaowen & Xue, Minggao & Cao, Ruiyi, 2024. "Do Chinese carbon-intensive stocks overreact to climate transition risk? Evidence from the COP26 news," International Review of Financial Analysis, Elsevier, vol. 94(C).
    • Handle: RePEc:eee:finana:v:94:y:2024:i:c:s1057521924002667
    DOI: 10.1016/j.irfa.2024.103334
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    More about this item

    Keywords

    Climate change risk; Limited attention; Overreaction; Retail investors; Greenwashing;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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