Stock Market Reactions to Climate Risk Events: A Systematic Literature Review and Research Agenda

As global warming intensifies, climate risks' impact on firm value has become a critical concern for academia and investors. This systematic literature review analyzes 50 event studies in this research field, classifying them by climate risk type. The analysis indicates that physical risk events predominantly result in negative abnormal stock returns for affected firms, whereas transition risk events tend to penalize the stock prices of carbon-intensive firms and reward those of low-carbon ones. The review's findings emphasize the role of investor overreaction, driven by salience bias, as a significant factor beyond traditional market efficiency considerations. Four propositions are derived, and eight research opportunities to address gaps in the understanding of stock market reactions to climate risk events are identified. This review encourages investors and firms alike to enhance climate risk management and advances research by synthesizing the current field through a theory-guided organizing framework that considers a range of factors influencing investor responses to salient climate risks.