Firm Value and Government Commitment to Combating Climate Change

We examine the impact of government commitment to combating climate change on firm value in relation to a firm's climate risk exposure. We identify major recent regulatory events around climate change that are not fully predicted, including the surprise election of Donald Trump to President of the US and the Paris Climate Change agreement. We predict opposite changes in value for polluting firms (with a high score on climate risk exposure) relative to non-polluting firms (with a low score on climate risk exposure) in reaction to these regulatory changes. We find that around the surprise election of Donald Trump, the market value of firms with high climate risk increases relative to the value of firms with low climate risk, and they find the exact opposite results around the Paris Climate Change agreement, which represents an increased commitment to combating climate change