Abstract:
Climate risk is posing significant challenges to all aspects of human society, including production and everyday living. As key entities in addressing climate change, whether firms can adequately respond to climate risk, through what mechanisms climate risk affects firms, and what economic consequences result from corporate responses to the impact are important research questions. Based on a textual analysis of the interactive text from investor platforms of the Shanghai and Shenzhen Stock Exchanges, this study innovatively constructs firm-level climate risk indicators and their sub-measures and examines corporate responses to climate risk from the perspective of cash holdings. The paper finds that climate risk, including climate physical risks and climate transition risks, increases the volatility of corporate cash flows and raises the likelihood of financial distress, thereby prompting firms to increase cash reserves for precautionary motives. These conclusions remain robust after addressing endogeneity issues such as omitted variables, alternative explanations, sample selection bias, and measurement errors. Further analysis finds that the behavior of firms increasing cash holdings significantly enhances the market value of cash, providing market-based evidence for the effectiveness of corporate responses to climate risk. This study offers indicator support for future research on climate risk and provides practical implications for improving firms' capabilities to manage climate risk.
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