Extreme temperature shocks and firms’ financial distress

Utilizing a panel dataset of Chinese A-share listed firms during 2001–2021, we examine whether and how extreme temperature shocks affect financial distress. Our empirical findings show that extreme temperature shocks have a robust positive effect on financial distress. Further analysis reveals two channels through which extreme temperature shocks exacerbate financial distress: reducing firms’ total factor productivity and tightening financing constraints. Moreover, this effect is stronger among firms with small market capitalization, vulnerability to climate change, poor corporate governance, and a lower proportion of intangible assets. Additional tests reveal that the disclosure of temperature extremes during the workday has a higher effect on financial distress. Overall, our results shed additional light on the important role of extreme temperature shocks in corporate risk management and government decision-making.