Extreme heat, supply chain spillovers, and firm performance

Climate change intensifies environmental risks, including extreme heat, posing significant challenges to corporate operations. Supply chains often span regions with diverse climatic conditions, exposing firms not only to direct extreme heat risks but also to indirect shocks transmitted through their supply chain partners. This study builds firm-level supply chain networks using quarterly data from 2011 to 2024 for Chinese A-share listed firms. The networks are based on the top five customers and suppliers disclosed in their annual reports. It examines how extreme heat experienced by upstream suppliers influences downstream firm performance. The results are as follows: (1) Extreme heat originating from upstream suppliers propagates downstream along the supply chain, undermining downstream firm performance. State-owned enterprises and downstream firms with highly concentrated suppliers experience a particularly pronounced negative effect. (2) Supply chain resilience, measured by resistance, recovery, and adaptability, effectively mitigates the adverse effects of extreme heat on firm performance. (3) The findings also indicate that extreme heat originating from downstream firms positively affects upstream suppliers' performance, revealing a reverse spillover effect of extreme heat within the supply chain. These findings provide empirical evidence and practical implications for improving firms' resilience to extreme heat, optimizing supply chain management, and strengthening overall supply chain stability.