The impact of carbon disclosure and carbon emissions intensity on firms' idiosyncratic volatility

Kasun Perera, Duminda Kuruppuarachchi, Sriyalatha Kumarasinghe and Muhammad Tahir Suleman

Energy Economics, 2023, vol. 128, issue C

Abstract: We study the effects of a firm's decision to disclose carbon emissions and carbon emissions intensity on the idiosyncratic volatility (IdVol) of US S&P 500 firms from 2009 to 2019. We document that the decision to disclose corporate carbon emissions reduces the IdVol of carbon-emissions-disclosing firms by 140 bps compared to non-disclosing firms on average. Although firms are being rewarded for disclosing their carbon emissions information, our robust evidence shows a significant negative impact of disclosed carbon emissions intensity on firms' IdVol. The magnitude of the negative effect of carbon emissions intensity increases with the IdVol quantile, implying that the impact of carbon emissions intensity depends on the size of firm-level risk. In light of the views of the managerial opportunism theory, our findings indicate a potential agency conflict over corporate investments to reduce carbon emissions intensity. We also find that firm-level research and development costs explain the negative association between firms' carbon emissions intensity and IdVol. Our results further document a significant differential effect of carbon emissions intensity on firms' IdVol following the Paris Agreement signed in 2015. Thus, our findings suggest that investing to reduce firms' exposure to carbon risk is a painstaking corporate decision in the modern business world.

Keywords: Carbon disclosures; Carbon emissions intensity; Idiosyncratic volatility; S&P 500 firms (search for similar items in EconPapers)
JEL-codes: C36 G12 G32 M14 Q51 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:128:y:2023:i:c:s0140988323005510

DOI: 10.1016/j.eneco.2023.107053

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