Using annual reports to measure firm weather exposure

55 Pages Posted: 20 Aug 2019 Last revised: 19 May 2021

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; University of Utah

Date Written: May 19, 2021

Abstract

Prior studies show the impact of weather on small samples of US firms using weather exposure ratings from various consulting entities, but the alternative hypothesis is that modern technological, financial, and insurance innovations neutralize this effect in large samples. However, large-sample measures of firm weather exposure are not widely available. We conduct a linguistic analysis of annual reports to derive a new time-varying measure of firm-level exposure to weather. Our measure can be cheaply and easily computed for all public firms and captures a broad spectrum of weather conditions. To demonstrate the power of our weather measure, we (1) show several intuitive properties of our measure using topic and cross-sectional analyses, (2) show that our measure systematically explains firm returns around exogenous severe local storms, and (3) create a systematic risk factor based on our measure and show that exposure to this factor is strongly priced by the market. Our study is one of the first to highlight the economic importance of weather exposure in the large sample, and shows how accounting disclosures can answer recent calls to build new climate factors and 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, Using annual reports to measure firm weather exposure (May 19, 2021). 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

University of Utah ( email )

1645 E. Campus Center
Salt Lake City, UT 84112
United States

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