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Firm-level risk of climate change: Evidence from climate disasters

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  • Ai, Li
  • Gao, Lucia S.

Abstract

While climate change impacts most regions, a company's physical location and geographic diversification could determine how it is affected by the risks associated with climate change. We explore information from extreme climate events to study whether and how they affect firm-level risks. The results indicate a positive association between a firm's exposure to catastrophic climate events, measured by headquarters and affiliation's locations and systematic and idiosyncratic volatility, suggesting that this risk is somewhat unpredictable and undiversifiable. Furthermore, geographic dispersion increases firms' exposure to extreme climate event risks. Our results also indicate that this effect is more pronounced in industries in which environmental issues are financially material and is mitigated by better environmental performance of the firm. In addition, the effect increases with investor awareness. Overall, our research contributes to a better understanding of businesses' exposure to the risks associated with climate change.

Suggested Citation

  • Ai, Li & Gao, Lucia S., 2023. "Firm-level risk of climate change: Evidence from climate disasters," Global Finance Journal, Elsevier, vol. 55(C).
    • Handle: RePEc:eee:glofin:v:55:y:2023:i:c:s1044028322001077
    DOI: 10.1016/j.gfj.2022.100805
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    Cited by:

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    2. Xinqi Chen & Yilei Luo & Qing Yan, 2024. "Does Extreme Weather Impact Performance in Capital Markets? Evidence from China," Sustainability, MDPI, vol. 16(16), pages 1-22, August.
    3. Collender, Sierra & Gan, Baoqing & Nikitopoulos, Christina S. & Richards, Kylie-Anne & Ryan, Laura, 2023. "Climate transition risk in sovereign bond markets," Global Finance Journal, Elsevier, vol. 57(C).
    4. Liu, Xiaoxi & Yuan, Xiaoling & Ge, Xing & Jin, Zhongguo, 2024. "Adaptation and innovation: How does climate vulnerability shapes corporate green innovation in BRICS," International Review of Financial Analysis, Elsevier, vol. 94(C).
    5. Chai Liang Huang & Lai Ferry Sugianto, 2024. "The scorching temperatures shock effect on firms’ performance: a global perspective," Review of Quantitative Finance and Accounting, Springer, vol. 62(4), pages 1651-1732, May.
    6. Wang, Yufeng, 2023. "Can the green credit policy reduce carbon emission intensity of “high-polluting and high-energy-consuming” enterprises? Insight from a quasi-natural experiment in China," Global Finance Journal, Elsevier, vol. 58(C).

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    More about this item

    Keywords

    Firm risk; Climate change; Disaster events; Investor awareness;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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