Using Annual Reports to Measure Firm-level Business Model Exposure to Weather
52 Pages Posted: 20 Aug 2019 Last revised: 30 Jun 2020
Date Written: June 29, 2020
Large-sample measures of firm-level exposure to weather are of great importance to scientific and economics research, but are not easily available. We argue that the institution of financial reporting solves this problem. We create a new firm-level linguistic measure of weather exposure using annual reports to assess the impact of weather on firms' financial and operational performance. After validating our measure using a difference-in-differences setting, we find that firms scoring high on our measure exhibit significantly lower returns and an increased likelihood of analyst forecast downgrades during exogenous weather shocks of extreme local storms. These firms also exhibit systematic risk beyond standard risk factors, suggesting that investors recognize firms' weather exposure as an economy-wide risk and price firms accordingly. Our evidence suggests that failing to account for cross-sectional variation in firms' weather exposure could be contributing to the recent null results on the relation between weather and firm performance.
Keywords: Corporate Investment, Firm Value, Profitability, Weather
JEL Classification: G12, G14, O13, Q54
Suggested Citation: Suggested Citation