Purpose This study aims to investigate how carbon risk affects corporate market value, offering empirical evidence on its value implications and transmission mechanisms. Design/methodology/approach Using data on Chinese A-share firms for the period 2008–2023, this study empirically examines the impact of carbon risk on firm value, performing robustness, mechanism and heterogeneity analyses to identify transmission channels and differential effects. Findings Carbon risk significantly reduces firm value, a result that is confirmed even after robustness checks. The mechanism analysis shows that this effect operates through operational volatility, financing constraints and investor sentiment, while the heterogeneity analysis indicates that a stronger digital and green transformation mitigates this effect. Research limitations/implications Unlike prior research, this study explicitly examines the mechanisms – operational volatility, financing constraints and investor sentiment – through which carbon risk affects firm value. However, findings are constrained by China’s specific institutional context. Practical implications This study has important implications to understand how carbon risk affects environmental outcomes, firm value, investment behavior and, indirectly, economic welfare. Originality/value This study constructs a composite carbon risk index, identifies the mechanisms through which carbon risk affects firm value via operating volatility, financing constraints and investor sentiment and characterizes heterogeneity from the perspectives of digital transformation and green transformation, providing new evidence on carbon risk pricing in China under its institutional characteristics and proposing related policy implications.
Liu et al. (Wed,) studied this question.