Is weather a systematic risk? Evidence from annual reports

49 Pages Posted: 20 Aug 2019 Last revised: 9 Oct 2020

See all articles by Venky Nagar

Venky Nagar

University of Michigan, Stephen M. Ross School of Business

Jordan Schoenfeld

Dartmouth College - Tuck School of Business

Date Written: October 5, 2020

Abstract

Recent research shows that weather events impact firms' operational and financial performance, raising the question of whether investors can diversify weather risk. We show that firms' exposure to weather is a systematic non-diversifiable risk, and that this risk is economically significant. We conduct a linguistic analysis of annual reports to derive a new time-varying measure of firm-level exposure to weather. Key innovations of our measure are that it can be easily computed for all public firms and it captures a broad spectrum of weather conditions (as opposed to any single weather condition such as extreme temperatures or rainfalls). After extensively validating our measure, we construct a factor based on this measure. Exposure to this factor is strongly priced by the market. Our study thus highlights the economic importance of weather risk and also answers calls by recent finance studies to build new climate factors and new large-sample measures of firm-level exposure to weather.

Keywords: Asset pricing, climate, firm value, systematic risk, weather

JEL Classification: G12, G14, O13, Q54

Suggested Citation

Nagar, Venky and Schoenfeld, Jordan, Is weather a systematic risk? Evidence from annual reports (October 5, 2020). Tuck School of Business Working Paper No. 3438428, Available at SSRN: https://ssrn.com/abstract=3438428 or http://dx.doi.org/10.2139/ssrn.3438428

Venky Nagar

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-647-3292 (Phone)
734-764-3146 (Fax)

Jordan Schoenfeld (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

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