The Nonlinear Effects of Extreme Temperature Heat Spells on Financial Performance

56 Pages Posted: 17 Aug 2022 Last revised: 12 Apr 2023

See all articles by Paul A. Griffin

Paul A. Griffin

University of California, Davis - Graduate School of Management

David H. Lont

University of Otago - Department of Accountancy and Finance

Martien Jan Peter Lubberink

Victoria University of Wellington - Te Herenga Waka - School of Accounting and Commercial Law

Date Written: April 1, 2023

Abstract

We examine a large sample of EU and UK firms to investigate the impact of extreme high temperature heat spells on three common financial performance measures, namely, the ratios of sales-to-assets, pretax profit margin, and return on assets. Using gridded data from Copernicus, we posit and find that extreme temperature heat spells impact financial performance nonlinearly. While extreme heat spells in normally hot conditions degrade financial performance, the opposite is true for extreme heat spells in normally cool conditions. These responses reveal that financial performance relates to extreme temperature heat spells as a hump shaped curve. For the sample as a whole, the inflection point of the sales-to-temperature hump shape occurs at 23˚C. As an indication of economic impact, for heat spells with a maximum temperature of five degrees above 23˚C, the ratios of sales-to assets, pretax profit margin, and return on assets fall by 2.9 percent, 13.5 percent, and 7.6 percent, respectively. We also find that heat spell duration affects financial performance only by intensifying the effects of temperature rather than having a direct effect itself. Our evidence responds to calls by accounting policymakers and other disclosure advocates for evidence on the effects and risks of acute weather events.

Keywords: Extreme temperature, sales performance, profit margin, nonlinear impact, excess stock return, unlisted firms, heat spell response function

JEL Classification: G14, Q51, Q54

Suggested Citation

Griffin, Paul A. and Lont, David H. and Lubberink, Martien Jan Peter, The Nonlinear Effects of Extreme Temperature Heat Spells on Financial Performance (April 1, 2023). Available at SSRN: https://ssrn.com/abstract=4181024 or http://dx.doi.org/10.2139/ssrn.4181024

Paul A. Griffin (Contact Author)

University of California, Davis - Graduate School of Management ( email )

3102 Gallahger Hall
Davis, CA 95616
United States
(530) 752-7372 (Phone)
(425) 799-4143 (Fax)

HOME PAGE: http://www.gsm.ucdavis.edu/griffin/

David H. Lont

University of Otago - Department of Accountancy and Finance ( email )

Box 56
Dunedin, Otago 9054
New Zealand
+64 3 479 8119 (Phone)
+64 3 479 8171 (Fax)

HOME PAGE: http://www.business.otago.ac.nz/acty/

Martien Jan Peter Lubberink

Victoria University of Wellington - Te Herenga Waka - School of Accounting and Commercial Law ( email )

New Zealand
+64 4 463 5968 (Phone)

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