Climate change, corporate risk-taking, and financialization: evidence from Chinese A-share non-financial listed companies

Abstract

AbstractClimate change-induced risks, such as global warming, can affect the economic development of entities and, consequently, the stability of financial markets. Businesses are progressively making the transition to green in order to lessen the negative consequences of climate threats. This study examines the relationship between corporate risk-taking (CRISK) and financialization (FIN) in light of climate change. The impact of business risk-taking on financialization is experimentally investigated through the transmission chain of “CRISK - enterprise value – FIN” using a fixed-effects model. The study also analyzes the moderating effect of climate change on the direct and indirect channels of climate change by using “temperature” and “investors’ concern about climate,” respectively. In addition, the empirical results are tested for robustness using propensity score matching and an instrumental variable method. This study’s findings reveal the following key insights. First, CRISK significantly enhances FIN by improving firm value. Second, enterprises with high financing constraints and manufacturing enterprises are more likely to have a positive correlation between CRISK and FIN. Third, the relationship between CRISK and FIN is enhanced by the direct transmission channel of increasing climate risk, but the indirect transmission channel is not significant. This study proposes policy recommendations to address the effect of climate risk on CRISK and FIN. Among these suggestions are the prudent distribution of financial resources among enterprises according to their level of risk-taking and the reinforcement of regulatory authorities’ financial oversight of businesses with high financing constraints and the manufacturing sector. By implementing these policies, companies can better manage climate-related risks and contribute to financial stability.