How does carbon transition risk drive corporate diversification? Evidence from heavy emitter firms in China

Khanh Hoang, Cuong Nguyen, Toan Luu Duc Huynh, Hailiang Zhang and Van Thi Thuy Vu

Economic Analysis and Policy, 2025, vol. 85, issue C, 1971-1994

Abstract: Carbon-intensive firms are increasingly exposed to carbon transition risks stemming from evolving climate policies, forcing them to adapt to a low-carbon economy. While prior research focuses on direct environmental initiatives to mitigate carbon transition risks, limited attention has been given to corporate diversification as an alternative strategy. This study investigates the impact of carbon transition risks on revenue diversification of Chinese listed firms, employing a difference-in-differences framework with the Paris Agreement as an exogenous shock. We find a significant increase in diversification of heavy-emitting firms following the Paris Agreement compared to their counterparts, without a corresponding increase in environmental investments or green technology adoption. This response is notably pronounced among firms with state ownership and is weakened when investment irreversibility is high. The findings align with the real options perspective and provide new insights into corporate responses to climate policy changes within the unique context of China.

Keywords: Asset liquidation; Carbon transition risk; China; Corporate diversification; Environmental protection; State ownership (search for similar items in EconPapers)
JEL-codes: G30 G31 Q51 Q58 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:85:y:2025:i:c:p:1971-1994

DOI: 10.1016/j.eap.2025.02.033

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