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The price of realized extreme climate events in the implied cost of equity capital: International evidence

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  • Xu, Weidong
  • Zhu, Danyu
  • Gao, Xin
  • Xing, Lu
  • Li, Donghui

Abstract

Using an international sample of 38 countries, we find that firms located in countries experiencing greater socioeconomic damage from extreme climate events have higher implied costs of equity capital. This finding is attributed to heightened operational uncertainty, greater information asymmetry, and intensified agency conflicts that arise in the wake of extreme climate events. The relation is stronger for firms that derive substantial revenue from domestic markets, operate in climate-vulnerable industries, or are closely held by domestic institutional investors. The effect also varies across countries and is concentrated in markets characterized by low transparency or limited integration into the global financial market. While extreme climate events negatively influence firm performance and valuation, they raise corporate awareness of climate risk.

Suggested Citation

  • Xu, Weidong & Zhu, Danyu & Gao, Xin & Xing, Lu & Li, Donghui, 2025. "The price of realized extreme climate events in the implied cost of equity capital: International evidence," Journal of Banking & Finance, Elsevier, vol. 180(C).
    • Handle: RePEc:eee:jbfina:v:180:y:2025:i:c:s0378426625001451
    DOI: 10.1016/j.jbankfin.2025.107525
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    Keywords

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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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