Climate change risk, investor sentiment, and the performance of new entrant firms

We explore how climate change risk affects the performance of new entrant firms seeking external capital (IPO firms) by using a sample of Initial Public Offerings from 2000 to 2020. We find climate change risk negatively affects underpricing and the long-term performance of the IPO firms. We further investigate the moderating effect of investor sentiment on the relationship between climate change risk and IPO long-term performance. We find that the negative effect of climate change risk on IPO performance is stronger for firms going public when investors are pessimistic. Exploring the channels through which climate change risk affects IPO performance, the results show that the effect of climate change risk on IPO underpricing is channeled through the IPO volume, while long-term underperformance is channeled through growth opportunities. Overall, our results are robust to various model specifications, firm-level measures of climate change risk, CEO traits, endogeneity concerns, and exogenous shocks. Our results provide insights into the management of new entrant firms on the importance of climate change risk as an additional risk factor.