IDEAS home Printed from https://ideas.repec.org/a/bla/bstrat/v34y2025i7p8554-8570.html

“Soft” Climate Change Exposure and Firm Performance Across Countries: Legitimacy Theory Perspective

Author

Listed:
  • Naimat U. Khan
  • Mushtaq Hussain Khan

Abstract

This paper examines the impact of a firm‐level ‘soft’ measure of climate change exposure on the performance of 6228 companies across 40 countries (2001–2021) using legitimacy theory. We find that the relationship between climate change and performance is contingent upon industry and the content of climate change exposure (opportunities, regulatory, and physical). Industry‐level analysis reveals that the top 10 high‐exposure industries generally experience negative performance impacts, whereas the bottom 10 low‐exposure industries exhibit positive effects. In terms of content, physical exposure positively affects performance, regulatory exposure negatively impacts performance, and opportunity exposure shows an insignificant positive effect. Climate change thus presents industry‐ and content‐specific risks and opportunities, highlighting the need for targeted policy incentives to encourage genuine climate‐related investments. Theoretically, climate exposure conveys either symbolic legitimacy (tokenism without real impact) or substantive legitimacy (genuine, tangible effects), depending on industry context and the nature of exposure.

Suggested Citation

  • Naimat U. Khan & Mushtaq Hussain Khan, 2025. "“Soft” Climate Change Exposure and Firm Performance Across Countries: Legitimacy Theory Perspective," Business Strategy and the Environment, Wiley Blackwell, vol. 34(7), pages 8554-8570, November.
    • Handle: RePEc:bla:bstrat:v:34:y:2025:i:7:p:8554-8570
    DOI: 10.1002/bse.70029
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/bse.70029
    Download Restriction: no
    File URL: https://libkey.io/10.1002/bse.70029?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. David F. Larcker & Anastasia A. Zakolyukina, 2012. "Detecting Deceptive Discussions in Conference Calls," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 50(2), pages 495-540, May.
    2. Pascual Berrone & Andrea Fosfuri & Liliana Gelabert, 2017. "Does Greenwashing Pay Off? Understanding the Relationship Between Environmental Actions and Environmental Legitimacy," Journal of Business Ethics, Springer, vol. 144(2), pages 363-379, August.
    3. Asghar Zardkoohi & Joseph S. Harrison & Mathew A. Josefy, 2017. "Conflict and Confluence: The Multidimensionality of Opportunism in Principal–Agent Relationships," Journal of Business Ethics, Springer, vol. 146(2), pages 405-417, December.
    4. Al-Shaer, Habiba & Uyar, Ali & Kuzey, Cemil & Karaman, Abdullah S., 2023. "Do shareholders punish or reward excessive CSR engagement? Moderating effect of cash flow and firm growth," International Review of Financial Analysis, Elsevier, vol. 88(C).
    5. repec:eme:aaaj00:aaaj-04-2017-2915 is not listed on IDEAS
    6. Anton Shevchenko, 2021. "Do financial penalties for environmental violations facilitate improvements in corporate environmental performance? An empirical investigation," Business Strategy and the Environment, Wiley Blackwell, vol. 30(4), pages 1723-1734, May.
    7. Sue Hrasky, 2011. "Carbon footprints and legitimation strategies: symbolism or action?," Accounting, Auditing & Accountability Journal, Emerald Group Publishing, vol. 25(1), pages 174-198, December.
    8. Scott, Daniel & Hall, C. Michael & Gössling, Stefan, 2019. "Global tourism vulnerability to climate change," Annals of Tourism Research, Elsevier, vol. 77(C), pages 49-61.
    9. Yan Jiang & Le Luo, 2018. "Market reactions to environmental policies: Evidence from China," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 25(5), pages 889-903, September.
    10. Painter, Marcus, 2020. "An inconvenient cost: The effects of climate change on municipal bonds," Journal of Financial Economics, Elsevier, vol. 135(2), pages 468-482.
    11. David Talbot & Olivier Boiral, 2018. "GHG Reporting and Impression Management: An Assessment of Sustainability Reports from the Energy Sector," Journal of Business Ethics, Springer, vol. 147(2), pages 367-383, January.
    12. Wang, Zhenkun & Lu, Weijie & Liu, Min, 2021. "Corporate social responsibility overinvestment in mergers and acquisitions," International Review of Financial Analysis, Elsevier, vol. 78(C).
    13. Melissa Dell & Benjamin F. Jones & Benjamin A. Olken, 2014. "What Do We Learn from the Weather? The New Climate-Economy Literature," Journal of Economic Literature, American Economic Association, vol. 52(3), pages 740-798, September.
    14. Shen, Hongtao & Yang, Qing & Luo, Le & Huang, Nan, 2023. "Market reactions to a cross-border carbon policy: Evidence from listed Chinese companies," The British Accounting Review, Elsevier, vol. 55(1).
    15. Mbanyele, William & Muchenje, Linda Tinofirei, 2022. "Climate change exposure, risk management and corporate social responsibility: Cross-country evidence," Journal of Multinational Financial Management, Elsevier, vol. 66(C).
    16. John Dumay & Charl de Villiers & James Guthrie & Pei-Chi Hsiao, 2018. "Thirty years ofAccounting, Auditing and Accountability Journal," Accounting, Auditing & Accountability Journal, Emerald Group Publishing Limited, vol. 31(5), pages 1510-1541, June.
    17. Peter M. Clarkson & Yue Li & Matthew Pinnuck & Gordon D. Richardson, 2015. "The Valuation Relevance of Greenhouse Gas Emissions under the European Union Carbon Emissions Trading Scheme," European Accounting Review, Taylor & Francis Journals, vol. 24(3), pages 551-580, September.
    18. Bolton, Patrick & Kacperczyk, Marcin, 2021. "Do investors care about carbon risk?," Journal of Financial Economics, Elsevier, vol. 142(2), pages 517-549.
    19. Nora Pankratz & Rob Bauer & Jeroen Derwall, 2023. "Climate Change, Firm Performance, and Investor Surprises," Management Science, INFORMS, vol. 69(12), pages 7352-7398, December.
    20. Salman Riaz & Rizwan Ali & Saria Hussain & Ramiz ur Rehman, 2023. "Chief executive officer attributes, stock's liquidity, and firm's performance," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(6), pages 3397-3408, September.
    21. Blau, Benjamin M. & DeLisle, Jared R. & Price, S. McKay, 2015. "Do sophisticated investors interpret earnings conference call tone differently than investors at large? Evidence from short sales," Journal of Corporate Finance, Elsevier, vol. 31(C), pages 203-219.
    22. Xu, Nianhang & Yuan, Qingbo & Jiang, Xuanyu & Chan, Kam C., 2015. "Founder's political connections, second generation involvement, and family firm performance: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 33(C), pages 243-259.
    23. Huynh, Thanh D. & Xia, Ying, 2021. "Climate Change News Risk and Corporate Bond Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 56(6), pages 1985-2009, September.
    24. Arthur Lewbel, 2012. "Using Heteroscedasticity to Identify and Estimate Mismeasured and Endogenous Regressor Models," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 30(1), pages 67-80.
    25. Linnenluecke, Martina K. & Griffiths, Andrew, 2010. "Corporate sustainability and organizational culture," Journal of World Business, Elsevier, vol. 45(4), pages 357-366, October.
    26. Benincasa, Emanuela & Betz, Frank & Gattini, Luca, 2024. "How do firms cope with losses from extreme weather events?," Journal of Corporate Finance, Elsevier, vol. 84(C).
    27. Dayuan Li & Min Huang & Shenggang Ren & Xiaohong Chen & Lutao Ning, 2018. "Environmental Legitimacy, Green Innovation, and Corporate Carbon Disclosure: Evidence from CDP China 100," Journal of Business Ethics, Springer, vol. 150(4), pages 1089-1104, July.
    28. Gunnar Friede & Timo Busch & Alexander Bassen, 2015. "ESG and financial performance: aggregated evidence from more than 2000 empirical studies," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 5(4), pages 210-233, October.
    29. Wu, Xiting & Luo, Le & You, Jiaxing, 2023. "Actions speak louder than words: Environmental law enforcement externalities and access to bank loans," Journal of Banking & Finance, Elsevier, vol. 153(C).
    30. Zhu, Bo & Hou, Rui, 2022. "Carbon risk and dividend policy: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 84(C).
    31. A Savage & E Gilbert & J Rowlands & AJ Cataldo, 2001. "Environmental disclosure in annual reports: A legitimacy theory perspective," South African Journal of Accounting Research, Taylor & Francis Journals, vol. 15(2), pages 19-48, January.
    32. Bose, Sudipta & Minnick, Kristina & Shams, Syed, 2021. "Does carbon risk matter for corporate acquisition decisions?," Journal of Corporate Finance, Elsevier, vol. 70(C).
    33. Evangeline O. Elijido-Ten & Peter Clarkson, 2019. "Going Beyond Climate Change Risk Management: Insights from the World’s Largest Most Sustainable Corporations," Journal of Business Ethics, Springer, vol. 157(4), pages 1067-1089, July.
    34. Ongsakul, Viput & Papangkorn, Suwongrat & Jiraporn, Pornsit, 2023. "Estimating the effect of climate change exposure on firm value using climate policy uncertainty: A text-based approach," Journal of Behavioral and Experimental Finance, Elsevier, vol. 40(C).
    35. Homroy, Swarnodeep, 2023. "GHG emissions and firm performance: The role of CEO gender socialization," Journal of Banking & Finance, Elsevier, vol. 148(C).
    36. Jaryn Bradford & Evan D. G. Fraser, 2008. "Local authorities, climate change and small and medium enterprises: identifying effective policy instruments to reduce energy use and carbon emissions," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 15(3), pages 156-172, May.
    37. A Savage & E Gilbert & J Rowlands & A J Cataldo, 2001. "Environmental disclosure in annual reports: A legitimacy theory perspective," South African Journal of Accounting Research, Taylor & Francis Journals, vol. 15(1), pages 19-48, January.
    38. Goss, Allen & Roberts, Gordon S., 2011. "The impact of corporate social responsibility on the cost of bank loans," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1794-1810, July.
    39. Olivier Boiral, 2016. "Accounting for the Unaccountable: Biodiversity Reporting and Impression Management," Journal of Business Ethics, Springer, vol. 135(4), pages 751-768, June.
    40. Leonardo Becchetti & Emanuele Bobbio & Federico Prizia & Lorenzo Semplici, 2022. "Going Deeper into the S of ESG: A Relational Approach to the Definition of Social Responsibility," Sustainability, MDPI, vol. 14(15), pages 1-22, August.
    41. Bhagat, Sanjai & Bolton, Brian, 2019. "Corporate governance and firm performance: The sequel," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 142-168.
    42. Qian, Wei & Schaltegger, Stefan, 2017. "Revisiting carbon disclosure and performance: Legitimacy and management views," The British Accounting Review, Elsevier, vol. 49(4), pages 365-379.
    43. Sun, Yongping & Yang, Ying & Huang, Nan & Zou, Xin, 2020. "The impacts of climate change risks on financial performance of mining industry: Evidence from listed companies in China," Resources Policy, Elsevier, vol. 69(C).
    44. Eugene F. Fama, 2021. "Contract costs, stakeholder capitalism, and ESG," European Financial Management, European Financial Management Association, vol. 27(2), pages 189-195, March.
    45. Cheung, William Mingyan & Chung, Richard & Fung, Scott, 2015. "The effects of stock liquidity on firm value and corporate governance: Endogeneity and the REIT experiment," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 211-231.
    46. Khadija S. Almaghrabi, 2023. "Climate Change Exposure and Firm Performance: Does Managerial Ability Matter?," Sustainability, MDPI, vol. 15(17), pages 1-16, August.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zheng, Chen & Sun, Zhiyue, 2025. "Organisation capital: A key asset for mitigating firm-level climate change exposure," Journal of Contemporary Accounting and Economics, Elsevier, vol. 21(3).
    2. Liu, Congcong & Luo, Danglun, 2025. "Feeling the heat: The impact of temperature anomalies on corporate investment in China," Economic Modelling, Elsevier, vol. 151(C).
    3. Md Yousuf Ali & Naif Alsagr & Nicholas Apergis & Manirul Islam, 2026. "Climate Risk and Capital Resilience in EU Deposit‐Taking Financial Institutions: Insights Into Environmental and Cultural Dynamics," Business Strategy and the Environment, Wiley Blackwell, vol. 35(3), pages 3740-3759, March.
    4. Brown, Kareen & Kim, Sohyung & Lee, Cheol & Pacharn, Parunchana, 2025. "Climate risk and asymmetric cost behavior," Advances in accounting, Elsevier, vol. 68(C).
    5. Suman Lodh & Nitin Deshmukh & Alireza Rohani, 2024. "Stemming the tide: Does climate risk affect M&A performance?," Business Strategy and the Environment, Wiley Blackwell, vol. 33(2), pages 858-881, February.
    6. Rina Datt & Le Luo & Reuben Segara, 2025. "Voluntary carbon assurance and the cost of equity capital: International evidence," Australian Journal of Management, Australian School of Business, vol. 50(4), pages 1129-1165, November.
    7. Wan, Wei & Lee, Chien-Chiang & Liu, Hao, 2026. "Intertemporal hedging and the carbon beta premium: Insights from Chinese corporate bonds," Energy Economics, Elsevier, vol. 153(C).
    8. Cao, Yuqiang & Liu, Yunxin & Lu, Meiting & Shan, Yaowen & Zu, Yanglan, 2025. "Generosity under environmental pressure: Climate change exposure and corporate philanthropy," International Review of Financial Analysis, Elsevier, vol. 104(PA).
    9. Thanh D. Huynh & Ying Xia, 2023. "Panic Selling When Disaster Strikes: Evidence in the Bond and Stock Markets," Management Science, INFORMS, vol. 69(12), pages 7448-7467, December.
    10. Florackis, Chris & Muktadir-Al-Mukit, Dewan & Sainani, Sushil & Zhang, Ziyang (John), 2025. "Stock market reaction to mandatory carbon disclosure announcements: The role of institutional investors," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 99(C).
    11. Basha, Shabeen Afsar & Benkraiem, Ramzi & Ben-Nasr, Hamdi & Masum, Abdullah-Al, 2025. "Does political risk exacerbate climate risk? Firm-level evidence," International Review of Financial Analysis, Elsevier, vol. 104(PA).
    12. Ashrafee Hossain & Samir Saadi & Abu S. Amin, 2023. "Does CEO Risk-Aversion Affect Carbon Emission?," Journal of Business Ethics, Springer, vol. 182(4), pages 1171-1198, February.
    13. Benkraiem, Ramzi & Dimic, Nebojsa & Piljak, Vanja & Swinkels, Laurens & Vulanovic, Milos, 2025. "Media-based climate risks and international corporate bond market," Journal of International Money and Finance, Elsevier, vol. 151(C).
    14. Zhou, Peng & Li, Xiang & Shi, Xing & Jiang, Kun, 2025. "Spillover of the carbon risk along the supply chain: Evidence from the U.S. corporate bond market," Journal of Business Research, Elsevier, vol. 201(C).
    15. Guesmi, Khaled & Makrychoriti, Panagiota & Pyrgiotakis, Emmanouil G., 2025. "Climate change exposure and green bonds issuance," Journal of International Money and Finance, Elsevier, vol. 152(C).
    16. He, Feng & Ren, Xingzi & Wang, Yueren & Lei, Xingfan, 2025. "Climate risk and corporate bond credit spreads," Journal of International Money and Finance, Elsevier, vol. 154(C).
    17. Li, Suyang & Qiao, Lu & Ren, Boru & Wang, Zilong, 2025. "Financing sustainability: Sustainable institutional investors and bank loan access," Journal of International Money and Finance, Elsevier, vol. 157(C).
    18. Yuan Ding & Daniel X. Zhang & Jessica K. Sun, 2025. "When Responsibility Meets Risk: Firm‐Level Political Risk, GHG Disclosure, and the Moderating Role of Market Complexities," Sustainable Development, John Wiley & Sons, Ltd., vol. 33(6), pages 8329-8349, December.
    19. Doruk, Ömer Tuğsal, 2025. "Climate change exposure and firm value: Evidence from low and middle income economies," Finance Research Letters, Elsevier, vol. 85(PB).
    20. Ben-Nasr, Hamdi & Basha, Shabeen Afsar & Shams, Syed, 2025. "The influence of carbon risk on debt structure," International Review of Financial Analysis, Elsevier, vol. 107(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:bstrat:v:34:y:2025:i:7:p:8554-8570. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://onlinelibrary.wiley.com/journal/10.1002/(ISSN)1099-0836 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.