Climate Change, Operating Flexibility, and Corporate Investment Decisions

Fisher College of Business Working Paper No. 2019-03-026

Charles A. Dice Center Working Paper No. 2019-26

49 Pages Posted: 4 Nov 2019

See all articles by Chen Lin

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Thomas Schmid

The University of Hong Kong - Faculty of Business and Economics

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: October 31, 2019

Abstract

Extreme temperatures lead to large fluctuations in electricity demand and wholesale prices of electricity, which in turn affects the optimal production process for firms to use. Using a large international sample of planned power plant projects, we measure the way that electric utilities’ investment decisions depend on the frequency of extreme temperatures. We find that they invest more in regions with more extreme temperatures. These investments are mostly in flexible gas and oil-fired power plants that can easily adjust their output, to improve their operating flexibility. Our results suggest that climate change is becoming a meaningful factor affecting firms’ behavior.

Keywords: climate change, extreme temperatures, firm investment, operational flexibility, electricity generation, power plants

JEL Classification: G30, G31

Suggested Citation

Lin, Chen and Schmid, Thomas and Weisbach, Michael S., Climate Change, Operating Flexibility, and Corporate Investment Decisions (October 31, 2019). Fisher College of Business Working Paper No. 2019-03-026. Available at SSRN: https://ssrn.com/abstract=3478625

Chen Lin (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Thomas Schmid

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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