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Firm-level climate risk and corporate investment efficiency: Evidence from a middle-income economy

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  • Sahu, Asis Kumar
  • Debata, Byomakesh
  • Dash, Saumya Ranjan

Abstract

This paper investigates the effect of firm-level climate risk exposure (FCRE) on investment efficiency using a comprehensive panel of non-financial firms listed on the National Stock Exchange of India between 2003–04 and 2022–23. We develop a novel FCRE measure by applying a Word2Vec-based natural language processing technique to firm-level Management Discussion and Analysis (MD&A) reports. Employing firm fixed effects estimations, the results indicate that higher climate risk exposure significantly increases investment inefficiency, constraining firms’ ability to achieve optimal investment levels. The adverse impact is further amplified in higher information opaque and pessimistic tone firms. The FCRE positively impacting the investment inefficiency through intensifying the market risk, financial constraints and lowering the CAPEX. Robustness tests, including propensity score matching, two-stage instrumental variable estimations, system GMM and Hackman two stage test, confirm that the findings are not driven by endogeneity. Our findings underscore the importance of climate risk in shaping corporate investment behavior and offer valuable insights for investors, managers, and policymakers seeking to integrate sustainability considerations into investment decision-making.

Suggested Citation

  • Sahu, Asis Kumar & Debata, Byomakesh & Dash, Saumya Ranjan, 2026. "Firm-level climate risk and corporate investment efficiency: Evidence from a middle-income economy," Finance Research Letters, Elsevier, vol. 91(C).
    • Handle: RePEc:eee:finlet:v:91:y:2026:i:c:s1544612326000498
    DOI: 10.1016/j.frl.2026.109518
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    References listed on IDEAS

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    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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