Climate change, ethical accounting, and the Paris agreement: does financial statement divergence influence shareholder value?

To explore the importance of accounting integrity in the context of climate change, we examine the effect of financial statement divergence (FSD)—a proxy for accounting irregularities—on shareholder value around the adoption of the Paris Agreement. FSD reflects inconsistencies in financial reporting that may signal ethical concerns or a lack of transparency. Our findings reveal a significant negative impact of FSD on stock returns, indicating that firms with greater accounting irregularities face adverse market reactions due to concerns about credibility and increased compliance burdens. This negative effect is especially pronounced for firms with greater exposure to climate change, which may face heightened investor scrutiny. Robustness checks, including propensity score matching and entropy balancing, support the reliability of our results. Overall, our study emphasizes the importance of ethical accounting practices and clear financial reporting in maintaining investor trust and corporate legitimacy amid rising climate-related regulation. The findings offer valuable insights for investors, regulators and corporate leaders.