Climate transition risk and stock price crash risk: Fama-french model approach and the moderating role of financial flexibility

Abstract

In financial economics, stock price crash risk is the probability that a stock experiences a rapid and significant decline in prices, and the consequences even spread to impact the market, investors and the economy in general. Due to its uncertain nature, stock price crashes have been a major prolonging concern for stakeholders, investors and policymakers. After the surge of sustainable development movements in the last decade, especially for the aims of United Nations Climate Change Conferences, climate change risks have been prominent business issues to be examined as a factor contributing to stock price crashes. Therefore, climate change is one of the most prominent issues worldwide, affecting mankind in various ways such as ecosystems destruction, the increase in frequency and intensity of extreme weather events which cause economic losses due to infrastructure damage and psychological impact on society. By using the dataset taken from 806 companies across during 10 financial years (2014 – 2023) and regression techniques such as TWFE and IV-2SLS, we found that there is a positive relationship between climate transition risk and stock price crash risk, ceteris paribus. We also explore the importance of achieving financial flexibility to deal with such dilemmas.