How does demand uncertainty from climate change exposure affect the firms' cost structures? Examining the real effects of climate change on the firms' operational decisions

Natalie Kyung Won Kim, Sera Choi, Taejin Jung and Sohee Park

Corporate Social Responsibility and Environmental Management, 2023, vol. 30, issue 6, 2969-2989

Abstract: This article explores how climate change exposure affects the firms' cost structures. We use Sautner et al.'s (2023) measure of firm‐level climate change exposure based on earnings conference calls of publicly‐listed U.S. companies from 2002 to 2020 to capture both the opportunities and threats brought about by climate change and understand the comprehensive impact of climate change on the firms' cost structure decisions. Prior literature has documented that firms strategically alter their cost structure when demand is uncertain and firms are concerned about unusually high or low demand realizations. We build on this prior literature and find that firms exposed to climate change adopt a more rigid cost structure with a higher proportion of fixed costs. Our findings suggest that firms perceive higher congestion costs from unusually high demand realizations caused by long‐term climate change. We find that the effect of climate change exposure on cost rigidity is more pronounced for firms with more positive demand expectations and firms in more competitive product markets. Lastly, we find that investors react positively to the rigid cost structure of firms exposed to climate change. Overall, this article sheds light on the real effects of climate change on the firms' operational decisions.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:wly:corsem:v:30:y:2023:i:6:p:2969-2989

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