​Impact of Climate Change on Firm Earnings

This study examines the impact of climate change on firm earnings, and how well managers and analysts anticipate the impact. Exploiting regional temperature variation around corporate headquarters, we find that firms’ earnings, on average, are negatively impacted by an unusually warmer climate. In economic terms, a 1 °C increase in temperature is associated with a $2 million decrease in earnings for a median-sized firm. The effect of temperature not only reduces sales, but also increases a number of expenses, including purchases from suppliers and factory production costs. In cross-sectional analyses, we find a less negative impact for firms with greater diversification and for those in industries with a high degree of lobbying. Industry analysis reveals most industries’ earnings are negatively impacted at the aggregate level, however, about one-third of firms within each industry are positively impacted. Managers and analysts tend to underestimate the negative impact of a warmer climate on earnings. Further, managers’ underestimation is especially strong in states where the legitimacy of climate change is questioned.

 

Artur Hugon is an Associate Professor of Accounting at Arizona State University. His research interests focus on accounting and the macroeconomy, as well as the economics of financial intermediation. He has published in leading accounting journals such as Contemporary Accounting Research, Journal of Accounting and Economics, Journal of Accounting Research, Review of Accounting Studies, and The Accounting Review. He graduated from The University of Southern California in 2004.

 

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