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Climate Change, Firm Performance, and Investor Surprises

Author

Listed:
  • Nora Pankratz

    (Board of Governors of the Federal Reserve System, Washington, District of Columbia 20551)

  • Rob Bauer

    (School of Business and Economics, Maastricht University, 6211LM Maastricht, Netherlands; International Centre for Pension Management, Toronto, Ontario M5A 3S5, Canada)

  • Jeroen Derwall

    (School of Business and Economics, Maastricht University, 6211LM Maastricht, Netherlands; School of Economics, Utrecht University, 3584 CS Utrecht, Netherlands)

Abstract

We link records of firm performance, equity analyst forecast errors, and stock returns around companies’ earnings announcements to firm-specific measures of heat exposure for more than 17,000 firms in 93 countries from 1995 to 2019. We find that increased exposure to extremely high temperatures reduces firms’ revenues and operating income. A one-standard-deviation increase in the number of hot days decreases revenues (operating income) by 0.6% (1.8%) of the average quarterly revenue (operating income). Moreover, we provide evidence that increased heat exposure impacts negatively on firm financial performance relative to analyst predictions and on earnings announcement returns. These findings indicate that capital market participants do not fully anticipate the economic consequences of heat as a first order physical climate risk.

Suggested Citation

  • Nora Pankratz & Rob Bauer & Jeroen Derwall, 2023. "Climate Change, Firm Performance, and Investor Surprises," Management Science, INFORMS, vol. 69(12), pages 7352-7398, December.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:12:p:7352-7398
    DOI: 10.1287/mnsc.2023.4685
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