Climate Change, Firm Performance, and Investor Surprises

In this study, we link records of firm performance, forecasts of analysts, and the returns after earnings announcements to firm-specific measures of heat exposure for more than 13,000 firms in 93 countries from 1995 to 2019. We find that increasing exposure to extremely high temperatures reduces firms’ revenues and operating income: Relative to firms’ performance over the financial quarter, a one standard deviation increase in the number of hot days decreases revenues (operating income) by 0.3% (1.3%). Moreover, the deviation in analyst estimates from actual financial performance and the earnings announcement returns become more negative when firms’ heat exposure increases. These findings indicate that investors do not fully anticipate the economic repercussions of heat as a first-order physical climate risk.