Climate Change, Innovation Efficiency, and Shareholder Wealth: Insights From the Paris Agreement

Abstract

We examine the impact of innovation efficiency on shareholder value in the context of climate change, using the novel research quotient (RQ) metric. The adoption of the Paris Agreement provides a unique setting to assess the effect of R&D productivity on stock market reactions. Our findings reveal that lower innovation efficiency, as measured by RQ, positively impacts cumulative abnormal returns (CARs) around the Paris Agreement's adoption. This suggests that firms starting from a lower baseline of innovation efficiency have greater potential for improvement and stand to gain significantly more from the Paris Agreement's climate-related incentives and support. In particular, a decline in innovation efficiency by one standard deviation improves the stock market reactions by 8.7%–9.9%. Also, we find that firms with stronger governance and higher profitability can further leverage these benefits, enhancing the positive market reactions to the Paris Agreement.