The financial impacts of climate risk : the dissertation presented in fulfillment of the requirements of the degree of Doctor of Philosophy, PhD in Finance at Massey University, Manawatū, New Zealand

Abstract

Drawing on state-level data on temperature anomalies, the dissertation contributes to the growing literature on the financial impacts of climate change on US-headquartered firms. Benchmarking long-term climate change, the first two chapters are empirical corporate finance papers examining the impacts of statewide climate change risks on corporate payout policy and the value of firms' financial flexibility. The third chapter is an asset-pricing paper that predicts corporate climate sensitivity of firms’ stocks to state-level climate change as a new systematic risk factor.

The first chapter shows that long-term climate change adversely affects corporate dividend payout policy. With state-level temperature anomalies (SLTA), the impacts of climate change on corporate payout are severely persistent when firms are exposed to abnormally warmer temperatures. Cash holdings, trade credit, and market leverage present statistically significant mediating roles in the impacts of long-term climate change on corporate payout policy. The impacts of SLTA on corporate payout are pronounced for firms with higher vulnerability to climate transition risk (e.g., polluting firms) since the Paris Agreement (COP21). Smaller and younger firms and firms with higher tangibility are sensitive to the long-term impacts of climate change across US states. The contributions of the study to related literature are threefold. First, the study shows that the consequences of climate change on firms are chronically severe. With the persistent predicted decrease in dividend policy, climate change affects firms’ growth prospects, with its geographical complexity, escalating earnings uncertainty for firms. Second, the long-term systematic risks of climate change imposed on firms are multifaceted, with high geographical divergence, for which firms might face great challenges in opting for flexible and reliable financing choices in the long-term period. The impacts of SLTA on corporate dividends are persistently robust when the study controls the mediating effects of corporate financial policies and the moderating effects of other climate risk factors.

The geographical complexity of long-term climate change impacts on firms is investigated in the second chapter through the lens of corporate financial flexibility. The second chapter shows that long-term climate change is adversely associated with the value of corporate financial flexibility (VOFF). Using the forward-looking and market-based measure, the predicted decrease in VOFF supports evidence from the first chapter by showing that long-term climate change systematically affects firms’ growth opportunities across the US states. The impact of SLTA on firms’ VOFF is persistent for firms with higher market-to-book values and larger firms. The impacts of long-term climate change on the VOFF are robust when the study controls the mediating effects of financial policies and the joint effects of other climate-related externalities.

The third chapter estimates the state-level corporate climate sensitivity (SL-CCS) to temperature anomalies. Using the predicted SL-CCS for each firm’s stock, the study examines whether the financial market is pricing the SL-CCS betas as a new systematic risk factor. The broad findings show that the pricing of financial markets to the SL-CCS betas is conditional on the levels of global warming across the US states. Investors demand a premium when firms’ stocks are exposed to abnormally warmer temperatures; otherwise, there is a negative association between SL-CCS betas and firms’ stock returns (RET). The varying associations between SL-CCS betas and RET are aligned with our predictions when the study tests for other endogenous and exogenous climate-related risk factors.