Using Annual Reports to Measure Firm-level Business Model Exposure to Weather

52 Pages Posted: 20 Aug 2019 Last revised: 30 Jun 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: June 29, 2020

Abstract

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

Nagar, Venky and Schoenfeld, Jordan, Using Annual Reports to Measure Firm-level Business Model Exposure to Weather (June 29, 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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
124
Abstract Views
859
rank
245,780
PlumX Metrics