Review Reports

Round 1

Reviewer 1 Report

Comments and Suggestions for Authors

The overall structure of this paper is well-designed, the language is fluent, and it employs sound theories and literature to develop its analysis. However, the following shortcomings remain:

Reviewer Comment 1. The paper’s core explanatory variable—climate risk—is extracted from annual reports through text mining. Although this approach is somewhat innovative, it essentially reflects managerial disclosure behavior and may not fully represent the actual physical climate shocks faced by firms. Therefore, it is subject to potential subjectivity and endogeneity. To enhance the credibility of the conclusions, the authors are advised to incorporate more objective and exogenous climate risk indicators in the baseline or robustness analyses—for example, extreme temperatures, abnormal precipitation, typhoons/floods, or other meteorological data, as well as remote-sensing–based disaster monitoring data—and compare or jointly examine these measures with the text-based climate risk indicator. If the CPR variable remains significant after controlling for these objective indicators, it would more convincingly demonstrate that the measure indeed captures “substantive climate shocks” rather than merely reflecting disclosure bias.

 

Reviewer Comment 2. The sample period includes major systemic shocks such as the global financial crisis (2008–2009) and the COVID-19 pandemic (2020–2021). These events simultaneously affect firms’ operating environments, market volatility, and stock price crash risk, and may confound the identification of the effect of climate risk on crash risk. To avoid such macro-level confounding, it is recommended that the authors exclude the crisis years, include crisis dummy variables, or conduct interaction tests with crisis indicators to explicitly account for the impact of the financial crisis and the pandemic. If the main results remain robust after removing these years, the paper’s causal interpretation that “climate risk affects stock price crash risk” will be considerably strengthened.

 

Reviewer Comment 3. The paper currently emphasizes two channels—tightened liquidity constraints and reduced risk-taking—but it lacks a detailed explanation of the micro-level mechanisms through which “managers’ subjective perceptions of climate risk” translate into specific financial behaviors. It is recommended that the authors draw on the behavioral finance or organizational decision-making literature to incorporate managerial expectations and changes in risk aversion into the theoretical framework, thereby enhancing the explanatory power of the proposed mechanisms.

 

Reviewer Comment 4. The paper’s current heterogeneity analysis focuses mainly on two dimensions—financing constraints and R&D investment—which align with the two proposed mechanisms of liquidity constraints and risk-taking capacity, and thus provide some explanatory power. However, these firm characteristics primarily reflect internal governance and financial conditions rather than structural differences in external climate risk exposure. Given that the core question of this study concerns “how physical climate shocks propagate and amplify into stock price crash risk in financial markets,” industry-level differences in climate sensitivity may in fact be an important factor shaping the transmission effects of climate shocks. Therefore, it is recommended that the authors extend the heterogeneity analysis by incorporating industry-level climate sensitivity.

 

Reviewer Comment 5. Although the policy recommendations section provides several macro-level directions, the content remains relatively general and not closely aligned with the empirical findings. It is recommended that the authors more clearly link the policy implications to the key mechanisms identified in the paper. For example, based on the two channels of “tightened liquidity constraints” and “reduced risk-taking capacity,” the authors may propose specific and actionable policy tools—such as improving climate disaster insurance systems, developing climate-sensitive credit policies, and promoting green innovation incentives. In addition, the policy suggestions could be differentiated across the levels of government, financial institutions, and firms, and may further include considerations such as enhancements to disclosure systems, region-specific policy designs, and potential policy side effects. Strengthening the specificity, feasibility, and theoretical alignment of the policy recommendations would further enhance the paper’s practical value and academic contribution.

Provided the author makes reasonable revisions and addresses the above issues, this paper can be published.

Author Response

Dear Editors and Reviewers,

We sincerely thank the Editors and Reviewers for their valuable comments on our manuscript entitled “Climate Shocks, Stock Price Crash Risk, and Corporate Sustainability: Evidence from China’s Financial System” (Manuscript ID: systems-4024306R1).

We have revised the manuscript accordingly. A detailed point-by-point response to all reviewers’ comments is provided in the Response Letter attached. All major revisions are highlighted in red and blue in the revised manuscript.

Thank you for your time and consideration.

Yours sincerely,
Wei Zhao

Author Response File: Author Response.pdf

Reviewer 2 Report

Comments and Suggestions for Authors

The paper examines whether physical climate shocks increase stock price crash risk using Chinese listed firms (2007-2023). The authors construct a text-based climate risk measure and find a positive relationship with crash risk, transmitted through liquidity constraints and reduced risk-taking. Green transformation moderates this effect.

Measurement validity - The climate risk indicator relies on word frequency in annual reports. This captures managerial disclosure choices, not actual climate exposure. The authors acknowledge spatial mismatch but their defense is unconvincing. A firm with dispersed operations faces different climate exposures than captured by text analysis. The measure conflates risk perception, disclosure strategy, and realized shocks.

2. Identification concerns The Bartik-style instrument passes weak instrument tests (F-stat = 40.742), but faces exclusion restriction challenges. The instrument combines extreme weather days with industry-level climate risk shares. While weather shocks are plausibly exogenous, they may violate exclusion restrictions through industry-wide channels: commodity price movements, supply chain disruptions affecting entire sectors, or industry-specific regulatory responses. The authors cite Goldsmith-Pinkham et al. (2020) but do not implement their diagnostic tests to determine whether identification derives from weather shocks or industry shares. Without these tests, the instrument's validity remains unclear.

Spurious mechanisms The liquidity constraint channel  shows climate risk reduces cash holdings. This result is mechanical: if climate risk is measured by disclosure intensity, firms discussing climate extensively may be capital-constrained, producing reverse causality. The same criticism applies to the risk-taking channel.

Author Response

Dear Editors and Reviewers,

We sincerely thank the Editors and Reviewers for their valuable comments on our manuscript entitled “Climate Shocks, Stock Price Crash Risk, and Corporate Sustainability: Evidence from China’s Financial System” (Manuscript ID: systems-4024306R1).

We have revised the manuscript accordingly. A detailed point-by-point response to all reviewers’ comments is provided in the Response Letter attached. All major revisions are highlighted in red and blue in the revised manuscript.

Thank you for your time and consideration.

Yours sincerely,
Wei Zhao

Author Response File: Author Response.pdf

Round 2

Reviewer 2 Report

Comments and Suggestions for Authors

 

OK