The relationship between firm-level climate change exposure, financial integration, cost of capital and investment efficiency

This paper investigates the impact of firm-level climate change exposure on corporate cost of capital, growth opportunities and new investment across 67 countries with varying degrees of financial integration from 2002 to 2021. The analysis documents that firms with high climate change exposure have a negative outlook, face increased cost of capital, and have reduced investment activity. Moreover, firms with climate change exposure are characterised by investment inefficiency and slower speed of adjustment towards the target investment. These findings become more pronounced for companies which operate in countries with high levels of financial integration. Our results are robust to alternative estimation techniques that address model sensitivity, endogeneity, and selection bias issues.