Climate litigation and financial markets: A disciplinary effect?

Climate litigation has witnessed a surge in recent decades, raising questions about its economic and financial implications. This paper investigates the disciplinary effect of climate litigation on corporations, focusing on stock price movements for targeted firms and their industry peers in response to announcements of lawsuit filings and negative court decisions. By using a combined event study and panel regression methodology for 77 lawsuit filings and 19 negative decisions that occurred between 2005 and 2021 in North America or Europe, we find that market reactions are quite limited. On average, lawsuit filings do not lead to stock price declines for targeted entities and their industry peers, indicating a lack of perceived financial threat by financial markets. Negative court rulings, while slightly affecting targets, do not result in spillovers to industry peers. However, nuances emerge, revealing that an increased frequency of lawsuits filings generates stronger stock declines for the industry around new filings. Regarding claims, legal actions seeking compensatory damages result in more negative stock returns when initiated. Also, lawsuits brought by individuals and NGOs, as opposed to government bodies, lead to stronger negative market reactions towards targets and peers around both filings and negative decisions. In the end, despite attracting significant media attention, our findings suggest that the disciplinary effect of climate litigation has been relatively weak thus far.