How Does Climate Risk Affect Corporate Innovation? Evidence from China

In this study, we explore how climate risk affect corporate innovation using a sample collected from 293 cities in China between 2014 to 2020. We construct a city-level climate risk indicator to measure the degree of damage from climate-related natural disasters, and find that climate risk has a negative association with corporate innovation investment and output. These patterns are not likely to be driven in different identification strategies including instrumental variable (IV) design, propensity score matching (PSM) approach, confounding variable test, Fama-MacBeth approach, etc. Our mechanism analyses reveal that climate risk impedes corporate innovation through encouraging firms to hold higher free cash flow; lower innovation investment is an important channel for climate risk to reduce innovation patent output. Further analyses find that: (1) the impact of climate risk on corporate innovation is more pronounced for high-tech firms compared with other firms; (2) higher financial constraints can weaken the impact of climate risk on corporate innovation; (3) the relationship between climate risk and corporate innovation is less salient in firms with female chairman or CEO. Overall, our findings contribute to the existing literature on climate risk and corporate innovation, and provide important and timely implications for listed firms and regulators