Is weather a systematic risk? Evidence from annual reports
54 Pages Posted: 20 Aug 2019 Last revised: 26 Jan 2021
Date Written: January 25, 2021
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 temperatures or rainfalls). We conjecture and find several systematic patterns of our weather measure in our sample. We then create a systematic risk factor based on our measure and show that exposure to this factor is strongly priced by the market. Our study highlights the economic importance of weather risk and also answers calls by recent 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: Suggested Citation