Temperature fluctuations, climate uncertainty, and financing hindrance

Abstract

Undesirable temperature fluctuations pose significant financial risks for enterprises. By merging fine-grained meteorological data with a panel of publicly listed firms, we delve into the relationship between temperature volatility and financing constraints. Our analysis reveals a positive correlation between temperature fluctuations and increasingly stringent financing limitations. State-owned or large-scale enterprises endowed with greater resources and risk diversification mechanisms are more likely to counteract the adverse effects of temperature volatility. Furthermore, we furnish evidence indicating that temperature fluctuations exert a substantial influence on corporate labor productivity. In response, companies tend to expand their workforce and elevate wages during the fiscal year. Faced with dwindling income and escalating operational costs, enterprises significantly amplify their insurance expenditures. The pronounced escalation in default risk and borrowing costs could undermine investors' sanguine profit expectations, subsequently prompting declines in firms' price-to-earnings and price-to-book ratios. Our study underscores the imperative for executive management teams to prudently account for climate change-induced financing constraints when devising investment and production strategies.