Climate change risks and corporate financialization: Friend or foe? A theoretical and empirical analysis

Abstract

Climate change risk has emerged as a pressing factor that could reshape corporate financial management. Using the annual reports of listed companies in China, this study innovatively constructs a climate change exposure index to measure the climate change risks (CCRs) faced by listed companies in China from 2007 to 2021. This approach provides a more direct and nuanced measure of climate exposure than traditional proxy methods. Drawing on both theoretical and empirical analyses, we find that CCRs are significantly and negatively associated with financial asset holdings, indicating that firms reduce financialization in response to rising climate risks. This supports the hypothesis that financial assets are held primarily for investment substitution rather than precautionary motives. The negative effect is more pronounced among firms with higher financial constraints, stronger corporate governance, and higher executive shareholding ratios. Furthermore, we observe that as CCRs increase and financialization declines, firms reallocate capital toward cash reserves and environmental investment, reflecting a strategic shift toward resilience and sustainability. These findings contribute to the literature on climate finance and corporate behaviour and offer policy-relevant insights for aligning financial regulation and corporate governance with climate risk management in emerging markets.