Estimating the effect of climate change exposure on firm value using climate policy uncertainty: A text-based approach

Abstract

Exploiting innovative measures of climate policy uncertainty and firm-specific climate change exposure derived from state-of-the-art textual analysis, we examine the impact of climate policy uncertainty on firm-specific climate change vulnerability and find that a rise in policy uncertainty exacerbates firm-specific exposure significantly. Then, using climate policy uncertainty to generate exogenous variation in firm-specific vulnerability in an instrumental-variable analysis, we show that companies more susceptible to climate change experience significantly lower firm value. In particular, an increase in firm-specific vulnerability by one standard deviation diminishes firm value by 5.4-5.9%. Climate policy uncertainty originates at the national level and is probably exogenous to individual firms’ characteristics. Our results are thus less vulnerable to endogeneity and likely reflect causality, rather than a mere correlation. Finally, the adverse effect of climate risk on firm value is more pronounced for firms with more fixed assets and for those located in the states or cities where the threat of climate change is more acute but is less evident for firms that pay higher dividends.