Spillover Effect of Climate Disaster for Management Forecast

Abstract

Climate disasters not only impose substantial economic costs on firms that are directly exposed, but they also generate significant externalities. In this study, I examine how climate disasters hitting product market peers affect management forecasts of a firm that was not directly exposed to significant climate disasters. I find that a firm is less likely to issue an earnings forecast when its product market peers experienced significant climate disasters. The spillover effects are mitigated by the focal firm’s past disaster experience or climate change-related regulatory intervention. My findings are robust to controlling for various alternative explanations. I also find some evidence that climate disasters hitting product market peers are associated with lower efficiency of a firm’s innovation efforts. Collectively, my evidence suggests that an idiosyncratic shock such as climate disaster causes spillover effects transmitted across the entire market through distorting management forecasts and strategic planning.