Climate policy uncertainty and firm investment

Abstract

AbstractThis article investigates the relation between climate policy uncertainty and firm investment in China. We quantify climate policy uncertainty in China based on the news from two leading mainland newspapers: the Renmin Daily and the Guangming Daily. Using the sample of Chinese A‐share companies from January 2003 to September 2021, we find robust evidence that firms exhibit lower levels of investment when facing to higher climate policy uncertainty. Specifically, we also show that this negative effect is more profound for state‐owned enterprises, carbon‐intensive enterprises, and enterprises with lower risk taking. The results also give evidence that the effect of climate policy uncertainty on firm investment can last up to three quarters and disappear within 1 year. Finally, we propose that investment irreversibility is plausible channel through which climate policy uncertainty discourages investment. Overall, these results shed light on the real effects of climate policy uncertainty and the determinants of investment.