Climate Risk and Corporate Value: Evidence from Temperature Bins and Panel Regression
By Bo Wu
DOI https://doi.org/10.48550/arXiv.2503.14233
Abstract
In empirical research, this article uses daily climate data provided by the National Oceanic and Atmospheric Administration (NOAA) of the United States to construct a temperature box with a range of 5°C, focusing on analyzing the impact of extreme high temperatures (>30°C) and extreme low temperatures (≤-10°C) on the asset value of enterprises. The results based on panel regression model show that extreme high and low temperatures can significantly reduce the asset value of enterprises. In the robustness test, this article used lagged climate data for testing, and the results still showed that extreme high temperatures had a significant negative impact on the asset value of enterprises, verifying the reliability of the benchmark regression results.
In depth heterogeneity analysis shows that in the process of addressing climate risks, companies exhibit significant differentiation based on different ownership types and industry characteristics. According to research, state-owned enterprises are relatively less affected by extreme weather due to their resource advantages and policy preferences. In addition, foreign-funded enterprises demonstrate a high level of risk resistance due to their strong management efficiency and supply chain control capabilities. In the manufacturing sector, heavy industries such as steel and communication manufacturing are particularly affected by the negative effects of extreme weather, which fully demonstrates that these industries face more severe challenges when dealing with extreme weather conditions.
Overview
This research investigates how extreme temperatures, both high (above 30°C) and low (below -10°C), impact the asset value of companies. Using daily climate data from the National Oceanic and Atmospheric Administration in the United States, the study employs a panel regression model. The findings reveal that both extreme high and low temperatures significantly reduce enterprise asset values. Additionally, they demonstrate that the effects vary based on factors such as company ownership and industry type, showing that state-owned enterprises and foreign-funded companies are better able to withstand climate risks compared to private firms.
Introduction
Research Background
Extreme weather events have increasingly been recognized for their disruptive effects on corporate profitability and value, primarily through economic losses and supply chain disturbances. For instance, the severe floods in Thailand in 2011 had a profound impact on local industries and the broader economy. This paper emphasizes the need for companies to urgently integrate climate risk assessments into their investment and operational strategies.
Research Significance
The research offers new insights by utilizing high-frequency temperature data to explore the nonlinear effects of climate change on firm values. This approach enhances the understanding of how different ownership structures and industries are affected, ultimately informing corporate responses to climate risks. Practically, the findings provide valuable information for stakeholders working toward sustainable business practices and policies, especially in reducing carbon emissions.
Findings and Key Insights
Theoretical Contributions
The study introduces a method of analyzing the impacts of temperature variations on corporate values using daily data, contrasting with less precise models previously employed. It identifies significant heterogeneity in responses to climate risks depending on ownership types (government-owned vs. private) and industries (heavy manufacturing vs. light industries).
Empirical Findings
- Extreme Temperature Effects: The research indicates that both extreme high and low temperatures adversely affect the asset values of firms. Specifically, when temperatures rise above 30°C or drop below -10°C, asset values typically decline due to reduced productivity and deteriorating working conditions.
- Robustness Tests: Using lagged data to verify results confirmed that high temperatures consistently inflict significant harm on firm asset values, validating the initial regression outcomes.
- Heterogeneity Analysis:
- Ownership Types: The analysis revealed that privately owned enterprises are more vulnerable to extreme weather than state-owned ones. Foreign companies also showed a higher capacity to withstand such risks, possibly due to superior management and resource allocation.
- Industry Variations: Companies in heavy industries, like steel and telecommunications, faced more severe impacts from severe weather events compared to those in service-oriented sectors, which can adapt more rapidly to changing conditions.
Policy Recommendations
The study suggests several strategies for enhancing corporate resilience to climate risks:
- Government Role: Policymakers should facilitate climate adaptation by recognizing the critical role of businesses in climate governance and adapting regulations and subsidies to enhance climate-resilient infrastructure.
- Corporate Strategies: Companies are encouraged to adopt green technologies, improve supply chain management, and enhance their disclosures regarding climate risk to meet increasing investor demands.
- Market Incentives: Establishing market mechanisms, such as carbon trading and financial incentives, can help enterprises reduce emissions and improve resilience against climate-related disruptions.
Conclusion
The research concludes that climate risks pose an existential threat to corporate valuations, particularly for specific industries and ownership types. As the effects of climate change escalate, proactive measures from businesses and policymakers are essential to mitigate these risks. Enhanced understanding of climate impacts on corporate financials can lead to better strategic planning and investment decisions, ultimately contributing to sustainable development goals.
In summary, as climate events become more frequent and severe, a deeper integration of climate risk management into corporate strategies and policies is necessary to safeguard asset values and ensure long-term economic viability in an evolving environmental landscape.