Abstract
Using an international sample of 38 countries, we find that firms located in countries experiencing greater socioeconomic damage from extreme climate events have higher implied costs of equity capital. This finding is attributed to heightened operational uncertainty, greater information asymmetry, and intensified agency conflicts that arise in the wake of extreme climate events. The relation is stronger for firms that derive substantial revenue from domestic markets, operate in climate-vulnerable industries, or are closely held by domestic institutional investors. The effect also varies across countries and is concentrated in markets characterized by low transparency or limited integration into the global financial market. While extreme climate events negatively influence firm performance and valuation, they raise corporate awareness of climate risk.
| Original language | English |
|---|---|
| Article number | 107525 |
| Journal | Journal of Banking and Finance |
| Volume | 180 |
| Early online date | 5 Aug 2025 |
| DOIs | |
| Publication status | Published - 30 Nov 2025 |
Funding
Weidong Xu would like to thank the National Social Science Foundation of China for financial support (Grant No. 22BGL063). Donghui Li would like to thank the National Natural Science Foundation of China (Grant No. 72373099), Shenzhen Fundamental Research (Key Program) (Grant No. JCYJ20240813142906009), and Excellent Graduate Mentor Team Cultivation Project of Shenzhen University for financial support.
Keywords
- Expected stock returns
- Implied costs of equity capital
- Realization of extreme climate events
ASJC Scopus subject areas
- Finance
- Economics and Econometrics
