# How does the climate risk affect the firm growth: Evidence from China

## TL;DR

This study explores how climate risk affects firm growth in China, finding a non-linear relationship where moderate risk can boost growth but excessive risk harms it.

## Contribution

The study introduces a novel framework showing how climate risk's impact on firm growth is mediated by managerial perceptions and financial development.

## Key findings

- Climate risk has an inverted U-shaped relationship with firm growth, with moderate risk promoting growth through adaptive strategies.
- Managerial perceptions of climate risk influence internal control quality and operational efficiency, affecting growth potential.
- Financially developed regions experience a higher inflection point for climate risk's negative effects due to better credit access and persistent challenge perception.

## Abstract

Corporate development is threatened by climate risk, which challenges business operations and long-term planning at an unprecedented scale and frequency. Based on the challenge–threat theory framework, this study uses data from Chinese A-share listed companies from 2008 to 2022 to systematically explore the effect of climate risk on firm growth and its transmission mechanisms. The findings indicate that (1) climate risk exhibits an inverted U-shaped non-linear relationship with firm growth. Moderate climate risk promotes firm growth by stimulating adaptive strategies (e.g., technological upgrades and financing expansion), but once the threshold is exceeded, resource constraints intensify, leading to a significant decline in growth potential. (2) Climate risk influences internal control quality and operational cost control efficiency through managers’ cognitive assessments (challenges or threats), which, in turn, indirectly affect the potential for firm growth by reducing agency costs, improving earnings quality, expanding profit margins, and lowering credit risks. (3) The level of financial development moderates the inflection point of climate risk. In financially developed regions, firms have greater access to credit resources, and managers maintain a more persistent perception of climate risk as a challenge. Their inverted U-shaped inflection point is significantly higher than that of firms in less developed regions, enabling them to view climate risk as a long-term challenge and sustain its promotional effect. This study integrates macro- and micro-perspectives to reveal the double-edged sword effect of climate risk. The theoretical foundation and practical insights can help enterprises respond to climate risk dynamically and formulate differentiated policies.