Research Investigates Impact of Weather Events on Public Companies’ Financing Strategies
A paper examining the impact of climate risk on the business strategy of publicly-traded companies, written by Dr. Henry He Huang and Dr. Joseph Kerstein, both associate professors of accounting at Sy Syms School of Business, has been published in the 2017 edition of the International Journal of Business Studies. The paper, “The impact of climate risk on firm performance and financing choices: An international comparison,” was co-authored with Chong Wang, a professor at The Hong Kong Polytechnic University.
While the impact of climate on business is not a new topic, especially now, when climate change is covered so much in the media, the three authors’ approach was specific because they focused on the data from individual companies, rather than regions, which is the more common tactic.
The study looks at individual companies located in or doing business in regions where devastating weather events such as hurricanes, floods or heatwaves are likely to happen but hard to predict, and are often not covered by insurance. When these severe weather events occur, companies are at risk in two ways: physical assets can be damaged and operations can be interrupted. This increase in operating risk leads to the need for firms to preserve cash. Among the paper’s conclusions is that firms located in places characterized by these more severe weather events are likelier to hold more cash in reserve, to have less short-term debt but more long-term debt, and are less inclined to distribute cash dividends.
“Our challenge was trying to narrow down a subject as broad and important as climate risk,” said Kerstein. “We found that few papers considered the important question of how or whether firms adjusted their financial policies to protect themselves against the potential devastation of major storms, droughts, etc. This issue is particularly relevant today in light of the fact that sufficient insurance is becoming increasingly infeasible with the growing severity of climate risk.”
By comparing individual firms in 55 nations around the world, Huang, Kerstein and Wang did observe that the risk of climate events is greater in some countries and more likely to affect specific industries. Of the 55 countries, the U.S. ranked among the riskiest top 25 percent. Tourism, agriculture, transportation and transportation were the most vulnerable industries.
Huang’s and Kerstein’s research may be valuable to investors as well as scholars. “This study also allows investors to evaluate the adverse impact of climate risk on individual firms’ operational performance and make firm-specific investment decisions accordingly,” Huang said. He and Kerstein are continuing their research in this field, he added, working on a project that examines the impact of climate risk on U.S. individual firms’ costs for bank loans.