How Do Managers Weigh Climate Risk When Making Financing and Accounting Decisions? An International Comparison

• In Event: Climate, the Environment, and Sustainability

Abstract

The advent of increasingly worse climate conditions has created potentially greater systematic risk to companies throughout the global economy. Few studies have directly considered the financing and accounting choices made by publicly-listed firms across the globe in response to such risks. We attempt to do so using the Global Climate Risk Index (Kreft and Eckstein, 2014), which captures the extent of a country’s weather-related losses from events such as storms, floods, heat-waves, etc. (referred to as ‘climate risk’ throughout the paper). As expected, we find that climate risk is associated with lower and more volatile earnings and cash flow. Consistent with policies that attempt to moderate these effects, we find that firms located in countries with greater climate risks are more likely to make certain financial choices. These include holding more cash: having lower short-term debt but greater long-term debt: being less likely to distribute cash dividends: engaging in earnings management to smooth earnings. A primary implication of our findings is that firms are unable to strictly rely on insurance to mitigate their country-wide climate risks leading to greater reliance on financial policies to offset some of the effects.

Authors

• He Huang, Yeshiva University

• Joseph Kerstein, Yeshiva University

• Chong Wang, University of Kentucky