Climate Change Exposure and the Value Relevance of Earnings and Book Values of Equity

Journal of Sustainable Finance and Accounting, Forthcoming

70 Pages Posted: 24 Apr 2024

See all articles by Iftekhar Hasan

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Joseph Micale

New Jersey Institute of Technology - Martin Tuchman School of Management

Donna Rapaccioli

Fordham University - Gabelli School of Business

Date Written: April 15, 2024

Abstract

We investigate whether a firm’s exposure to climate change, as proxied by disclosures during quarterly earnings conference calls, provides forward-looking information to investors regarding the long-term association of stock prices with current earnings and the book values of equity. We observe that, following a key regulatory mandate around the formation of the cap-and-trade program to reduce emissions related to climate change, firms’ climate change exposure decreases the association between current earnings and stock prices while increasing the relevance of book values of equity (i.e., historical earnings). However, these relationships flip when the sentiment around climate change exposure is negative, suggesting that the risks related to climate change exposure provide forward-looking information to investors when they evaluate the ability of current earnings to predict firm values. Such a relationship is stronger for new economy firms and is sensitive to conservative accounting. We also observe that the inclusion of climate change disclosure to our models improves the joint ability of earnings and book values to predict stock prices.

Keywords: Climate Change, Value Relevance, Earnings, Market Pricing, Conservatism, New Economy

JEL Classification: M41, M48, G12, G14

Suggested Citation

Hasan, Iftekhar and Micale, Joseph and Rapaccioli, Donna, Climate Change Exposure and the Value Relevance of Earnings and Book Values of Equity (April 15, 2024). Journal of Sustainable Finance and Accounting, Forthcoming , Available at SSRN: https://ssrn.com/abstract=4795168

Iftekhar Hasan

Fordham University ( email )

45 COLUMBUS AVENUE
GBA-5TH FLOOR
NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Joseph Micale (Contact Author)

New Jersey Institute of Technology - Martin Tuchman School of Management ( email )

United States

Donna Rapaccioli

Fordham University - Gabelli School of Business ( email )

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