Combating extreme weather through operations management: Evidence from a natural experiment in China

Abstract

In recent years, frequent extreme weather events have had serious impacts on firms' operations and supply chain management. More and more firms are taking extreme weather into consideration in their formulation of strategies and are striving to employ a range of measures to mitigate the adversity caused by extreme weather. Many of prior extreme weather-related studies focus on its socioeconomic or financial impacts in developed countries. In the operations management field, while researchers have long investigated various climate change-related issues, limited efforts have been specifically devoted to extreme weather’s operational performance implications, and it remains unclear whether operational resources or strategies employed in the firm-specific endogenous glitches or disruptions can be successfully scaled to such exogenous extreme conditions. Employing the staggered difference-in-differences approach and analyzing a large-scale panel dataset of Chinese listed firms, we find that there is a significant negative relationship between extreme weather and firms' operational performance in terms of labor productivity. Further analysis shows that firms with high levels of operational slack, digital technology deployment, and cash hedging are less significantly affected by extreme weather. Our findings remain consistent across various robustness checks including parallel trend analysis, alternative measures, Mahalanobis distance matching approach, placebo test, and adjustment of estimation window. These findings contribute to the extreme weather and disaster management literature in several ways and have significant practical implications for firms.