Corporate investment under different manifestations of climate policy uncertainty: An analysis within a real options framework

Understanding how climate policy uncertainty (CPU) influences corporate investment is vital for effective policy design and green transition. This paper develops a real options framework to examine the differential effects of three manifestations of CPU—its average level, variation magnitude, and event frequency—on corporate investment behavior. The theoretical model reveals that greater CPU magnitude lowers the expected return drift, accelerating investment, while higher event frequency increases return volatility, raising investment thresholds and inducing delays. Using quarterly data from Chinese listed firms (2004–2023), we construct a firm-level CPU index by combining provincial media sentiment with company disclosures. Empirical analysis confirms that CPU significantly affects investment expenditures: average CPU and volatility magnitude stimulate investment, whereas high-frequency fluctuations suppress it. Mechanism tests identify R&D spending, strategic diversification, and risk management as key corporate responses to uncertainty. Heterogeneity analysis indicates that firms that are less sensitive to climate policy, face lower financing constraints, exhibit higher corporate social responsibility, and are led by overconfident managers display stronger investment responses to CPU. Moreover, this paper finds that firms exhibit significant investment herding behavior in the presence of CPU, and that this effect is more pronounced among state-owned enterprises and firms in the decline stage of the life cycle. These findings offer new insights into firm-level adaptation under policy uncertainty and provide practical guidance for climate policy coordination and corporate strategy.