Firm-level climate change exposure and firm efficiency

Abstract

This paper investigates the nexus between firm-level climate change risk exposure and firm efficiency using a sample of firms from the United States during 2001-2022. We use a wide range of measurements from financial data, textual data, and secondary measures generated from Data Envelopment Analysis to measure firm-level climate risk exposure and efficiency. We find that exposure to climate change risk hurts firm efficiency, regardless of the firms’ emission nature. Our empirical evidence shows that such a detrimental effect does not come from physical climate change risks but rather from the climate transition risk, thus corroborating the significant impact of the transition from a “grey” economy to a lower-carbon one on corporate outcomes. Moreover, financial constraints worsen this effect, while asset redeployment, vertical integration, and market concentration mitigate the negative impact of climate change risk on firm-level efficiency. Interestingly, high-efficiency firms generally are affected more than low-efficiency firms.

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