Management Accounting Section Midyear Meeting

Risk from the Air: Climate Change and Corporate Performance

• In Event: ESG Issues

Abstract

This paper examines the impact of physical climate change risk on corporate performance. Using exposure to transitory wildfire smoke as a unique setting, I find that more smoke exposure leads to lower operating income and lower sales revenue. On average, one additional day of wildfire smoke exposure leads to a loss of 1.9 times the average daily operating income. The effect is stronger when a firm has a higher R&D-to-employee ratio, a higher average labor cost, and operates in an industry that requires high-skilled labors, suggesting that lower productivity of employees who perform cognitive tasks drives the decreases in operating income and sales revenue. Moreover, I find that market participants do not fully price the impact of wildfire smoke on firm operations until the next annual earnings announcement. Firms that discuss more climate change exposure in their earnings conference calls are subject to less impact from future wildfire smoke exposure, suggesting that transparent disclosure is associated with better management of climate change risks. Overall, this paper documents the diffuse impacts of climate change that firms and investors could underestimate.

Author

• Jing Kong, Michigan State University