Climate risk and future stock price crash: Evidence from U.S. firms

This study investigates the impact of climate risks on stock prices and explores the measures that corporate managers may take to stabilize their company's stock price in response to unexpected climate risks. We analyze a sample of U.S. firms from 1996 to 2022 and find that firms located in disaster-prone counties are associated with a higher risk of stock market crashes. The results indicate that firms exposed to climate risks are more likely to experience unexpected earnings and breaks in earnings strings. While earnings management can sometimes provide short-term benefits, it can also lead to long-term risks and negative consequences on stock price crashes. Moreover, mature firms and firms with higher CEO pay-performance sensitivity are more susceptible to stock market crashes. The findings suggest that climate risk can induce short-term thinking among managers, affecting market valuation. By shedding light on the complex relationship between climate risks and financial risks, this study can inform responsible investment strategies and corporate governance policies that promote transparency, accountability, and long-term value creation.