Do Chinese carbon-intensive stocks overreact to climate transition risk? Evidence from the COP26 news

Abstract

We exploit an exogenous event—the 26th United Nations Climate Change Conference of the Parties (COP26)—and a short-term event study method to examine whether Chinese stock markets overreact to climate transition risk. The results show that retail investors overreact to COP26 news by depressing the current prices of carbon-intensive stocks below their fundamental values, leading to higher subsequent returns. Institutional investors and corporate insiders implement contrarian trading strategies to reduce the deviations of stock prices from their fundamentals. Our results are consistent with the “salience bias” hypothesis. In addition, carbon-intensive stocks with higher environmental, social, and governance (ESG) composite scores face greater selling pressure due to suspicions of greenwashing. Our findings contribute to understanding the impact of investor structure and behavioural patterns on the pricing efficiency of climate risk.