Management Accounting Section Midyear Meeting

Firm-Level Climate Change Exposure and Cost Structure

• In Event: Cost Structure and Behavior

Abstract

This paper examines whether and how firms respond to climate-related issues by focusing on their choice of cost structure. Building on the prior literature which highlights the role of demand uncertainty in cost structure, we hypothesize that climate change exposure increases future demand uncertainty which affects cost elasticity. Using a measure of firm-level exposure to climate change identified from earnings conference calls, we find that climate change exposure reduces the elasticity of sales, general, and administrative (SG&A) costs. The effect of climate change exposure on cost elasticity is more pronounced for firms with positive demand expectations and for firms in competitive product markets. Lastly, we find that investors positively react to a less elastic cost structure for firms that are more exposed to climate-related issues. Overall, this study adds to the debate on the role of climate change in firms’ operational decisions and provides implications for the real effects of climate-related issues.

Authors

• Sera Choi, Korea National Open University

• Taejin Jung, IE University

• Natalie Kyung Won Kim, IE University

• Sohee Park, Seoul National University