Climate Risk, Stock Crash Risk, and Greenhouse Gas Emission Trading Scheme: Evidence From Korea

Abstract

This study examines the relationship between climate risk and stock crash risk and the moderating effect of greenhouse gas emission trading scheme (ETS). Numerous studies have tested stock price crash risk measured by the negative skewness of return distributions in the areas of internal governance mechanism. While interest in environmental performance for sustainable growth of firms has increased, there are no studies on the effect of climate risk on stock crash risk. Thus, we find that climate risk (a firm’s greenhouse gas emissions and energy consumption) increases stock crash risk, and the positive effect of climate risk on stock crash risk is weakened after introduction of the emission trading scheme. This study theoretically extends the literature on the empirical determinants of stock crash risk, and practically provides investors with proven information about whether climate risk is worth considering during investment decisions. Furthermore, at the level of government policy, we can suggest that a monitoring system is needed to mitigate potential information asymmetry problems in firm with high climate risk.