Climate-Related Uncertainty and Managerial Short-Termism
51 Pages Posted: 12 Jul 2022
Date Written: June 15, 2022
This study explores whether shocks to climate-related uncertainty induce increased managerial short-termism. Theory suggests that when individuals face long-run uncertainty, they often resort to short-termism to realize more immediate and certain benefits. Consistent with this, we expect that increases in climate-related uncertainty will lead to greater managerial myopia. We use extreme weather events to capture increases in climate-related uncertainty, and we use real earnings management (REM) to proxy for managerial short-termism. Using a difference-in-differences empirical design to exploit within-firm variation in extreme weather exposure across time, we find that managers increase REM when exposed to more weather events. We also find that this relation varies predictably with several cross-sectional factors, including firms’ susceptibility to climate-related uncertainty, external monitoring, and managerial incentives. Finally, we find that extreme weather exposure is associated with an increased incidence of “just meeting” earnings benchmarks and a reduction in innovative output. This study contributes to the literature examining the consequences of increases in climate-related uncertainty by providing new evidence on how managers respond to the growing threat of weather events. Our findings also provide empirical evidence supporting concerns raised by major investors and corporate executives over the potential influence of extreme weather exposure on managerial short-termism.
Keywords: Climate-related uncertainty, managerial short-termism, extreme weather events, real earnings management, innovation outputs
JEL Classification: G32, M12, M40, M41, O32, Q54
Suggested Citation: Suggested Citation