Climate Change and Corporate Risk: How Executives and Auditors Respond to Environmental Uncertainty? Evidence from the Chinese Audit Market

This paper develops a province- and city-level Normalized Difference Vegetation Index (NDVI) as a proxy variable for climate change. From a risk-preference perspective, this study examines the behaviors and interactions between executives and auditors in the context of climate change, using panel data from China’s A-share market from 2010 to 2023. The empirical results indicate that each one-unit increase in climate change risk is associated with a 0.219%-point increase in audit fees. Specifically, executives increase their preference for risk policies as a strategic response to the negative externalities of climate change; however, such policies exacerbate firm earnings volatility. When auditors capture these negative dynamics of risk and earnings, they negatively respond by charging higher fee premiums. A comprehensive heterogeneity analysis is also conducted, and more economic consequences are examined. This study reveals how executives and auditors respond to climate change and the more subtle link between climate, executives, and auditors.