Using annual reports to measure firm weather exposure
55 Pages Posted: 20 Aug 2019 Last revised: 19 May 2021
Date Written: May 19, 2021
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: Suggested Citation