Assessing firm-level climate risk disclosure and shareholder value in EU: insights from the Paris Agreement

Purpose - This research uses a firm’s disclosure of climate risk index derived from deep learning analysis of earnings conference calls to investigate how these disclosures affect market reactions among publicly traded European companies. To address potential endogeneity issues, the study employs an event study methodology, using the Paris Agreement as an exogenous shock that signalled a stronger global commitment to climate action. Design/methodology/approach - Apart from the standard ordinary least squares regression analysis, several robustness tests are used to ensure the validity and reliability of the results. These tests include propensity score matching, entropy balancing, and instrumental-variable analysis. Our final sample comprises 439 observations from European countries. Findings - Our research shows that a firm’s greater exposure to climate risk causes the market to react negatively to the event. This suggests that regulatory scrutiny may raise costs for the company, which could ultimately result in lower stock returns. Originality/value - Using a unique climate risk disclosure metric based on textual analysis in a European context, our study is the first to investigate the impact of firm-level climate risk disclosure on shareholder wealth.