Does Carbon Risk Influence Stock Price Crash Risk? International Evidence

This article examines the relationship between carbon risk and future stock price crash risk, focusing on an international sample of firms. Inherently, complex and deep uncertainties of carbon risk limit investors’ ability to fully understand and incorporate carbon risk into equity pricing and create room for opportunistic managers to hide bad news about poor carbon performance. Such pricing uncertainties and information asymmetry can result in significant overpricing of stocks (i.e., underpricing of carbon risks), especially for carbon‐intensive firms, thereby exposing these stocks to future stock price crash risks. In line with this argument, we find that carbon risk is positively associated with future stock price crash risk. However, we find that better carbon disclosure quality reduces pricing uncertainties and information asymmetry, which attenuates the positive effect of carbon risk on future stock price crash risk. Similarly, internal monitoring (e.g., corporate governance) and external monitoring (e.g., institutional investors and financial analysts) help alleviate information asymmetry related to carbon risk, thus reducing crash risk. In countries with stakeholder‐oriented business cultures, high climate change performance, and financial transparency, as well as for companies that link compensation to climate change performance, the positive association between carbon risk and stock price crash risk is weaker.