Do firms take environmental responsibility seriously under climate uncertainty? New evidence from firm risk perspective

Purpose This study examines the nexus between climate uncertainty and corporate risk level in the unique context of the Chinese listed firms. Design/methodology/approach Using the computed climate uncertainty index at the city level over the period 2014–2020, we perform panel data regression techniques as the baseline methodology while controlling for industry and year-fixed effects. We also employ endogeneity tests (including the two-stage least squares method (2SLS), confounding variable tests and propensity score matching approaches (PSM)) and different robustness checks. Findings We find that climate uncertainty is significantly negatively associated with corporate risk level in an emerging market, which deviates from the prior results based on international evidence. Managers have more incentives to conceal business risk under climate uncertainty in such a market, resulting in a difference between firms’ actual business risk and reported business risk. We further corroborate our inference that this relationship is achieved through the mediating role of earnings management and financial constraints. In addition, we find that this negative relationship is (1) more pronounced in firms with low analyst coverage and media coverage and (2) less pronounced in firms with high government subsidies. Originality/value This paper enriches the research about the impacts of climate uncertainty at the firm-level, and pioneers in examining how firms perceive and respond to climate uncertainty in the emerging market. Our findings have important practical implications for financial regulators, investors, shareholders and environment policymakers.