Stock liquidity and corporate climate performance: evidence from China

Abstract

In this study, we consider for the first time whether and how stock liquidity impacts corporate climate performance in China. We find that an increase in stock liquidity is highly associated with lower carbon emissions. To address endogeneity concerns, we exploit a unique quasi-natural experiment in China— the stock market liberalization (Shanghai-Shenzhen Hong Kong Stock Connect). Using difference-in-differences (DID) estimations, we find that carbon emissions for treatment firms substantially decrease after the stock market liberalization. The impact of stock liquidity is more pronounced for enterprises facing severe financial constraints, greater equity dependence, and operating in pollution-intensive sectors. Similarly, we find that external monitoring, carbon abatement investment, and green innovation are plausible channels through which stock liquidity drives carbon emissions reduction. We further find that the sensitivity of corporate climate performance to improved stock liquidity becomes stronger following the Paris Agreement. Overall, we uncover new evidence on the impact of stock liquidity on corporate climate performance, expanding our understanding of the role of financial markets towards a greener economy.