Climate Change, Firm Performance, and Investor Surprises

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. This paper was accepted by Colin Mayer, Special Section of Management Science on Business and Climate Change. Funding: N. Pankratz gratefully acknowledges financial support from the French Social Investment Forum and the Principles for Responsible Investment [PhD Research Grant 2017]. Supplemental Material: Data are available at https://doi.org/10.1287/mnsc.2023.4685 .