Climate Risk and Firms' Shadow Relocation: Evidence From China

ABSTRACT Using recruitment big data matched to Chinese listed firms and their subsidiaries, covering 26,439 firm‐year observations from 2014 to 2023, we find that parent firms exposed to higher climate risk rarely relocate their registered locations. Instead, they reallocate employment toward subsidiaries located in lower‐risk regions. We term this adaptive strategy shadow relocation. Decomposition results show that shadow relocation operates mainly through the diversion of hiring growth toward safer regions rather than retrenchment at the parent firm. This response is consistent with both profit‐seeking and risk‐avoidance motives, as climate risk erodes local profitability and reduces managerial risk tolerance. The effect is stronger where government climate attention is lower, climate policy uncertainty is higher, and subsidiary agency costs are lower. We further distinguish between types of climate risk. Transition risk is associated with creative destruction, reducing traditional employment while increasing green job creation, whereas physical risk generates no comparable structural adjustment. We discuss the implications of this less visible adaptation strategy for regional inequality and sustainable development.