Climate risk and asymmetric cost behavior

Abstract

Prior research indicates that managerial expectations about a firm's future can lead to asymmetric cost behavior or cost stickiness; optimism increases cost stickiness, while pessimism reduces it. We predict and find that firms facing greater climate risk exhibit less cost stickiness, aligning with the threat-rigidity perspective where managers are either reluctant to add new resources or dispose excess ones under high climate risk. This reaction intensifies over time. After the 1997 Kyoto Protocol, cost stickiness is less sticky, reflecting long-term intertemporal changes in managerial perceptions of climate risk and its impact on cost stickiness. In addition, firms in U.S. coastal states, those in agriculturally intensive states, or those financially constrained react more strongly to climate risk. Finally, we find evidence that political environments influence this cost behavior; firms show less cost stickiness under Democratic administrations and in states that vote Democratic.