How climate change shapes firm risk-taking behavior: Evidence from investment and environmental channels

This study investigates the relationship between climate change exposure and corporate risk-taking, employing a large cross-country dataset of 38,234 firm-year observations from 3992 unique firms over the period of 2002-2022. We provide novel evidence that firms with higher exposure to climate change are likely to reduce their corporate risk-taking. Our baseline results remain robust and consistent when applying entropy balancing to our sample, utilizing a quasi-natural experiment based on the Paris Agreement as an exogenous shock, and employing an instrumental variable approach. Next, as a novel contribution, we identify two separate transmission mechanisms, i.e., investment behavior and environmental practices, through which climate change exposure affects corporate risk-taking. Higher exposure leads to lower R&D intensity and improved investment efficiency, while also enhancing environmental performance and innovation, all of which contribute to more prudent risk-taking behavior. Finally, we provide novel evidence that information asymmetry and governance positively moderate the negative association between climate change exposure and corporate risk-taking. This finding suggests that stronger governance and reduced information asymmetry (higher transparency) at both the firm and country level can attenuate the negative impact of climate change exposure on corporate risk-taking. Overall, our results suggest that while climate change exposure tends to reduce corporate risk-taking, the strength of this effect substantially depends on the informational and governance context in which firms operate.