The Impact of Climate Risk on Firm Performance and Financing Choices: An International Comparison

Journal of International Business Studies, 2018, 49 (5), 633-656

47 Pages Posted: 4 Dec 2018 Last revised: 22 Mar 2021

See all articles by Henry He Huang

Henry He Huang

Yeshiva University - Sy Syms School of Business

Joseph Kerstein

Yeshiva University - Syms School of Business

Chong Wang

The Hong Kong Polytechnic University

Date Written: August 1, 2016

Abstract

Increasingly adverse climatic conditions have created greater systematic risk for companies throughout the global economy. Few studies have directly examined the consequences of climate-related risk on financing choices by publicly-listed firms across the globe. We attempt to do so using the Global Climate Risk Index compiled and published by Germanwatch (Kreft & Eckstein, 2014), which captures at the country level the extent of losses from extreme weather events. As expected, we find the likelihood of loss from major storms, flooding, heat waves, etc. to be associated with lower and more volatile earnings and cash flows. Consistent with policies that attempt to moderate such effects, we show that firms located in countries characterized by more severe weather are likelier to hold more cash so as to build financial slack and thereby organizational resilience to climatic threats. Those firms also tend to have less short-term debt but more long-term debt, and to be less likely to distribute cash dividends. In addition, we find that certain industries are less vulnerable to extreme weather and so face less climate-related risk. Our results are robust to using an instrumental variable approach, a propensity-score-matched sample, and path analysis, and remain unchanged when we consider an alternative measure of climate risk. Finally, our conclusions are invariant to the timing of financial crises that can affect different countries at different times.

Keywords: climate risk, extreme weather, earnings volatility, financing choice

JEL Classification: Q54, M41

Suggested Citation

Huang, Henry and Kerstein, Joseph J. and Wang, Chong, The Impact of Climate Risk on Firm Performance and Financing Choices: An International Comparison (August 1, 2016). Journal of International Business Studies, 2018, 49 (5), 633-656, Available at SSRN: https://ssrn.com/abstract=3281701

Henry Huang (Contact Author)

Yeshiva University - Sy Syms School of Business ( email )

New York, NY 10033
United States

Joseph J. Kerstein

Yeshiva University - Syms School of Business ( email )

United States

Chong Wang

The Hong Kong Polytechnic University ( email )

Hong Kong
Hong Kong

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