Climate sentiment-induced stock liquidity

Kuntal K. Das and Mona Yaghoubi

International Journal of Managerial Finance, 2025, vol. 21, issue 5, 1414-1436

Abstract: PurposeThis study examines the influence of firm-specific climate change sentiment on stock liquidity in the U.S. market. It investigates whether climate-related sentiment—especially regarding regulatory, physical, and opportunity-related risks—affects trading activity and liquidity in financial markets. The research focuses on how negative climate sentiment impacts investor behavior and market microstructure, with particular emphasis on the asymmetric effects of negative versus positive sentiment. It further explores the moderating role of the regulatory environment, including litigation risk and government spending exposure, to determine how institutional factors shape the relationship between climate sentiment and liquidity outcomes.Design/methodology/approachThe study employs firm-level climate sentiment data derived from earnings call transcripts, developed using machine learning techniques. It integrates these with stock-level liquidity measures—namely the Corwin-Schultz spread and Amihud illiquidity—using quarterly panel data for U.S.-listed firms from 2001Q1 to 2019Q4. The analysis applies fixed effects regressions with firm and time controls and conducts robustness checks using instrumental variables and sub-sample analyses. Channels involving information asymmetry are tested using financial reporting quality as a proxy, while cross-sectional heterogeneity is addressed through litigation risk and government exposure classifications.FindingsNegative sentiment related to climate regulatory risks significantly reduces stock liquidity, while sentiment tied to physical or opportunity-related risks has no consistent effect. The results are robust across illiquidity measures, and the effect is stronger in firms with lower financial reporting quality, consistent with an information asymmetry channel. The impact is also more pronounced in high-litigation-risk industries and in firms operating in sectors with greater government spending exposure. Positive climate sentiment has limited influence on liquidity, highlighting an asymmetric market reaction pattern. These findings remain significant after addressing potential endogeneity concerns.Originality/valueThis study advances climate finance literature by distinguishing between types of climate sentiment and identifying channels through which these perceptions impact liquidity. It also highlights the importance of firm transparency and regulatory oversight in mediating investor reactions. These insights can inform policymakers, investors, and firms on how climate communication and regulation shape market behavior and liquidity in increasingly climate-aware capital markets.

Keywords: Climate change sentiment; Stock liquidity; Asymmetric information; Regulatory environment (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/ijmf/article/21/5/1414/130 ... uced-stock-liquidity (text/html)
https://www.emerald.com/ijmf/article-pdf/21/5/1414 ... f-04-2025-0187en.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:ijmfpp:ijmf-04-2025-0187

DOI: 10.1108/IJMF-04-2025-0187

Access Statistics for this article

International Journal of Managerial Finance is currently edited by Dr Alfred Yawson

More articles in International Journal of Managerial Finance from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().