Firm-level climate risk and stock price crash: does investor attention or sentiment matter?

This study moves beyond traditional crash-risk channels focused on managerial bad-news hoarding to examine how firm-level climate risk translates into stock price crashes through investor behaviour. Using a novel text-based measure of climate exposure extracted from earnings call transcripts, we capture firm-specific regulatory, physical and opportunity-related climate risks. Our results show that higher climate risk exposure significantly increases the likelihood of stock price crashes. Investor sentiment plays a critical moderating role: Optimistic sentiment dampens the adverse effects of climate risk, whereas pessimistic sentiment amplifies crash vulnerability. By contrast, investor attention to climate issues, as measured by news intensity and search activity, has no meaningful influence. These patterns remain strong across different specifications and quasiexperimental analyses utilising major shocks such as the Global Financial Crisis, the Paris Agreement and the COVID-19 pandemic. The findings offer timely implications for investors, firms and regulators seeking to better recognise and oversee climate-driven financial instability