Carbon Risk and Stock Return—Evidence from Chinese A-Share Listed Companies

Using the carbon emissions data and stock return data of listed Chinese companies, we study the impact of carbon risk on corporate stock return. We find a negative and statistically significant effect on firms’ stock returns, and carbon risk has a heterogeneous effect, with a significant negative effect on stock returns in the sample of large-scale firms, firms with low corporate governance and firms with lower ESG scores. The divestment effect is a significant factor contributing to this negative correlation between carbon risk and corporate equity returns, carbon risk can decrease the shareholdings of institutional investors and analysis attention, especially in the sample of insurance. Furthermore, we further test the predictive effect of carbon risk on stock return and stock price crash risk, and we further found that carbon risk is a potential predictor of stock returns and positively influences stock price crash risk in the future. Overall, our results show that carbon risk does not generate “carbon premium” and institutional investors choose to reduce their holdings and provide empirical evidence for the development of differentiated regulatory environments by Chinese financial regulators.