Climate Uncertainty and Corporate Investment: Evidence from State-Led Climate Change Adaptation Plans

Abstract

We document that climate uncertainty negatively affects corporate investment. The effect is more pronounced for firms with higher capital intensity, higher operating inflexibility, and less redeployable capital. Our results are robust to using an instrumental variable approach and to using alternative climate uncertainty measure. Further, we find that climate adaptation plans mitigate the negative effects of climate uncertainty on corporate investment. We establish this result using the staggered introduction of State-led Climate Change Adaptation Plans. Our findings suggest that climate uncertainty can depress corporate investment, but climate adaptation plans shield firms from climate uncertainty contributing to investment resilience.