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Firm-level climate risk and corporate investment efficiency: Evidence from a middle-income economy

Asis Kumar Sahu et al.

Finance Research Letters2026https://doi.org/10.1016/j.frl.2026.109518article
AJG 2ABDC A
Weight
0.37

Abstract

This paper investigates the effect of firm-level climate risk exposure (FCRE) on investment efficiency using a comprehensive panel of non-financial firms listed on the National Stock Exchange of India between 2003–04 and 2022–23. We develop a novel FCRE measure by applying a Word2Vec-based natural language processing technique to firm-level Management Discussion and Analysis (MD&A) reports. Employing firm fixed effects estimations, the results indicate that higher climate risk exposure significantly increases investment inefficiency, constraining firms’ ability to achieve optimal investment levels. The adverse impact is further amplified in higher information opaque and pessimistic tone firms. The FCRE positively impacting the investment inefficiency through intensifying the market risk, financial constraints and lowering the CAPEX. Robustness tests, including propensity score matching, two-stage instrumental variable estimations, system GMM and Hackman two stage test, confirm that the findings are not driven by endogeneity. Our findings underscore the importance of climate risk in shaping corporate investment behavior and offer valuable insights for investors, managers, and policymakers seeking to integrate sustainability considerations into investment decision-making. • First study to explore how firm-level climate risk exposure (FCRE) detrimental impact on corporate investment efficiency. • Uses a state-of-the-art NLP techniques to assess firm level climate risk perception from management discussion and analysis. • Identifies market uncertainty and financial constraints as key economic channels through which climate risk distorts investment decisions. • Heterogeneity analysis shows that the detrimental impact of FCRE is more pronounced in high-energy intensity, low information transparency and pessimistic-tone firms.

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https://doi.org/https://doi.org/10.1016/j.frl.2026.109518

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@article{asis2026,
  title        = {{Firm-level climate risk and corporate investment efficiency: Evidence from a middle-income economy}},
  author       = {Asis Kumar Sahu et al.},
  journal      = {Finance Research Letters},
  year         = {2026},
  doi          = {https://doi.org/https://doi.org/10.1016/j.frl.2026.109518},
}

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Evidence weight

0.37

Balanced mode · F 0.40 / M 0.15 / V 0.05 / R 0.40

F · citation impact0.16 × 0.4 = 0.06
M · momentum0.53 × 0.15 = 0.08
V · venue signal0.50 × 0.05 = 0.03
R · text relevance †0.50 × 0.4 = 0.20

† Text relevance is estimated at 0.50 on the detail page — for your query’s actual relevance score, open this paper from a search result.