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
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: Suggested Citation