Firm climate risk and vertical integration: Evidence from China

Abstract

This study investigates the influence of firm climate risk on vertical integration using a sample of Chinese firms listed between 2007 and 2023 based on real option theory. Using machine learning methods, the study creates a climate-related dictionary to measure firm-level climate risk exposure. The results show that firms’ climate risk positively affects vertical integration, with the impact being stronger in regions with strict environmental regulations but weaker when CEOs have green experience. Further analysis reveals that a firm’s climate risk fosters vertical integration by promoting digital transformation. Firms should consider vertical integration as a strategy to enhance control over their supply chains and absorb sustainability-related knowledge within the supply chain, thereby strengthening their capacity to address climate risk. These findings advance our understanding of the strategic implications of climate risk and provide valuable insights into the complexities associated with climate change.