Climate risk has increasingly become a prominent long-term, systemic risk of global concern (Stroebel & Wurgler 2021). As such, investors and regulators have seen a surge in demand for firm-level disclosure of climate risk information (Ilhan et al., 2023), and how such disclosure affects firm value has thus become a growing academic interest (Phang et al. 2025). However, existing empirical studies on this question have yielded rather mixed results. Some research suggests that disclosing climate risk information can alleviate information asymmetry between firms and their stakeholders, thereby enhancing firm value through an “information effect” (Blanco et al., 2024; Guo et al., 2025). In contrast, others argue that such disclosures may heighten external stakeholders’ awareness and concerns about climate-related risks, reducing firm value via a “risk effect” (Pandey & Kumari, 2024; Bingler et al., 2024; Vestrelli et al., 2024).

A key reason for this divergence lies in the heterogeneity in the quality of climate risk disclosures. Climate risk disclosure remains largely voluntary in most capital markets, and even under mandatory regimes, firms retain substantial discretion over the content, tone, and extent of their disclosures (Matsumura et al., 2024). This discretion may lead to a misalignment between the risks firms report and their actual climate risk exposure, undermining the credibility and reliability of the disclosed information. As a result, empirical studies based on raw disclosure data without accounting for disclosure credibility are likely to produce inconsistent conclusions.

To address this limitation in existing literature, we construct a novel firm-level measure to assess the credibility of climate risk disclosure among Chinese listed firms and examine its impact on firms’ market value. Specifically, we develop a tailored climate risk keyword dictionary for Chinese firms, building on those by Sautner et al. (2023) and Li et al. (2024a). Based on this dictionary, we use the proportion of climate risk keywords in the Management Discussion and Analysis (MD&A) section of firms’ annual reports and in questions posted by investors on firms’ online interactive platforms to proxy for their levels of climate risk disclosure and actual exposure to climate risk, respectively. We then define the credibility of a firm’s climate risk disclosure, ClimateAui,t, as the difference between these two measures. By definition, a smaller ClimateAui,t indicates that a firm discloses relatively little climate risk information despite facing potentially large climate risk exposure, suggesting lower credibility in its climate risk disclosure.

Using a sample of Chinese listed firms from 2014 to 2024, we find that firms with higher climate risk disclosure credibility have higher Tobin’s Q values in the following year. This effect remains robust after using alternative key variables, and after applying propensity score matching and entropy balancing to address characteristic differences between firms with high and low credibility in climate risk disclosure. In addition, we instrument a firm’s climate risk disclosure credibility using the average credibility of its local and industry peers. Two-stage least squares (2SLS) regressions based on this instrumental variable confirm that the effect of climate risk disclosure credibility on firm market value is causal.

We further propose and validate that high climate risk disclosure credibility enhances firm value by reducing information asymmetry and improving corporate reputation. Specifically, we find that firms with higher disclosure credibility are associated with lower analyst earnings forecast dispersion, and receive a higher proportion of positively-toned posts from retail investors on online stock forums and more favorable news coverage from financial media. Our heterogeneity analyses are consistent with these mechanisms. The effect of climate risk disclosure credibility on Tobin’s Q is stronger for firms with greater green innovation or environmental investment, as these investments help firms better manage climate risks and build green reputations. Moreover, the effect is more pronounced for firms with less opaque financial reporting and higher ESG disclosure ratings, indicating that high-quality financial and non-financial disclosures complement the positive effects of credible climate risk disclosure. Finally, the effect is also stronger for firms with greater social capital, as proxied by larger charitable donations and poverty alleviation expenditures. These forms of social capital amplify the reputational benefits associated with credible climate risk disclosure, thereby enhancing its positive impact on market valuation.

Our study may contribute to the literature in three ways. First, we propose a novel approach to measuring firm-level credibility of climate risk disclosure. Prior studies often rely simply on the frequency of climate risk keywords in annual reports to gauge firms’ disclosure levels. Given the potential market impacts of such information, firms may exercise notable discretion in disclosing it, making this measure potentially biased. By comparing a firm’s actual climate risk exposure with its disclosed level of risk, our measure of disclosure credibility better addresses this issue and provides a useful tool for future research.

Second, we contribute new empirical evidence from China to the ongoing debate on whether climate risk disclosure enhances firm value through an information effect (Blanco et al., 2024) or undermines it via a risk effect (Vestrelli et al., 2024). Our results indicate that credible climate risk disclosure is positively associated with firm value, consistent with the information effect. This finding is driven by reduced information asymmetry and improved corporate reputation, mechanisms through which transparent and reliable disclosure strengthens investor confidence. Importantly, as our measure accounts for the alignment between disclosure and actual risk exposure, it mitigates potential biases arising from strategic or incomplete reporting, thereby enhancing the validity of our conclusions.

Third, we enrich the emerging literature on the consequences of the gap between climate risk disclosure and climate risk materiality. While some studies conflate these two concepts, recent work highlights that they are empirically distinct (Grewal et al. 2021). For example, Matsumura et al. (2024) find that investors rely on their anticipations of climate risk materiality to evaluate the credibility of managerial reporting on such risks, and that this credibility significantly moderates the impact of such disclosure on debt costs. We extend this line of research by demonstrating that such credibility also plays a crucial role in shaping a firm’s market value.