Climate Change, Demand Uncertainty, and Firms’ Investments: Evidence from Planned Power Plants

Fisher College of Business Working Paper No. 2023-023

Charles A. Dice Center Working Paper No. 2023-23

84 Pages Posted: 2 Oct 2023

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)

Date Written: September 29, 2023

Abstract

How does demand uncertainty affect firms’ investment decisions? We consider this issue from the perspective of electricity-producing firms and their planned investments in new power plants. Using plausibly exogenous variations in temperature predictions across scientific climate models to measure uncertainty about future electricity demand, we find that uncertainty increases investments in plants with flexible production technologies but depresses non-flexible investments. The net effect of uncertainty on investments is positive if firms have access to flexible investment opportunities. These results are consistent with models in which the impact of uncertainty on investments depends on the investments’ production flexibility.

Keywords: Climate change, demand uncertainty, firm investment, production flexibility, operating leverage, power plants

JEL Classification: G30, G31

Suggested Citation

Lin, Chen and Schmid, Thomas and Weisbach, Michael S., Climate Change, Demand Uncertainty, and Firms’ Investments: Evidence from Planned Power Plants (September 29, 2023). Fisher College of Business Working Paper No. 2023-023, Charles A. Dice Center Working Paper No. 2023-23, Available at SSRN: https://ssrn.com/abstract=4588135 or http://dx.doi.org/10.2139/ssrn.4588135

Chen Lin

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 (Contact Author)

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 the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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