Despite extensive documentation of carbon risk’s influence on financial markets, its impact on stock price fragility (SPF) remains unclear. We utilize the signing of the Paris Agreement (PA) as a quasi-natural experiment to investigate the impact of carbon risk on SPF. Our findings indicate that following the signing of the PA, the price fragility of stocks with high carbon risk significantly increases; specifically, the rise in carbon risk substantially amplifies SPF. Additionally, we observe that after the PA was signed, institutional ownership of stocks in high-carbon-risk industries decreased, whereas the concentration of fund ownership and the correlation of fund flows for these stocks increased. The positive effect of heightened fund ownership concentration and fund flow correlation on the price fragility of high-carbon-risk stocks outweighs the negative impact of reduced institutional ownership on SPF, leading to an overall increase in SPF driven by increased carbon risk.
Wang et al. (Tue,) studied this question.