Environmental risk and stock price crash risk: Evidence from energy substitution policy adoption

Exploring the staggered adoption of energy substitution policy, we investigate the relationship between reduced environmental risk and stock price crash risk. The result shows that stock price crash risk decreases following the policy's passage. Moreover, firms disclose more environmental information (specifically, hard information) following the policy and the policy's effect on crash risk is stronger for firms with higher information asymmetry. These findings are consistent with signaling theory, i.e., reduced environmental risk increases environmental information disclosure, leading to a lower stock price crash risk. Overall, this paper suggests that reduced environmental risk plays a crucial role in decreasing crash risk, providing empirical support for adopting clean energy.