CLIMATE CHANGE RISK, FIRM VALUE, AND FINANCIAL FLEXIBILITY: EVIDENCE FROM SRI LANKA

Abstract

"This study investigates the impact of Climate Change Risk (CCR) on Firm Value (FV) among listed companies in Sri Lanka, an emerging economy highly exposed to climate-related hazards. Specifically, it explores the moderating role of Financial Flexibility (FFL) in mitigating the effects of CCR on FV, recognising the growing importance of adaptive financial strategies in the face of environmental uncertainty. A quantitative approach was adopted, using panel data regression analysis based on secondary data collected from firms listed on the Colombo Stock Exchange (CSE) for the period 2019–2023. CCR was proxied by greenhouse gas emissions as a percentage of sales, while FV was measured using Tobin’s Q. FFL was introduced as a moderating variable, with firm size, leverage, and profitability included as control variables. The data were analysed using STATA software. The results indicate that CCR does not have a statistically significant direct impact on FV. However, FFL significantly moderates the CCR–FV relationship, suggesting that firms with higher FFL are better positioned to manage climate-related disruptions. These findings highlight the strategic importance of financial resilience in mitigating environmental risks. For practitioners and policymakers, the study underscores the value of embedding FFL into corporate strategy as a buffer against long-term climate uncertainties. Future research should use larger, more diverse samples and include firm-specific variables like governance, innovation, and market position to improve external validity and deepen understanding of CCR and FFL impacts.