The microeconomic effects of temperature changes

Abstract

This paper uses financial data from listed Chinese manufacturing companies, combined with meteorological data, to estimate the microeconomic effects of temperature changes. By constructing seasonal average temperatures, we find that average summer temperatures significantly reduce the financial performance, while average winter, spring, and autumn temperatures do not have a significant effect on the corporate financial performance. We further find that the effect of temperature changes on corporate financial performance is nonlinear through temperature bins variables. Both extreme low temperatures (<-12 °C) and high temperatures (>27 °C) have a negative impact on corporate financial performance. The mechanism tests find that high temperatures not only reduce the labor productivity of firms, but also increase the corporate adaptation actions, leading to increased adaptation costs, crowding out productive funds and causing a capital mismatch. Further heterogeneity analysis confirms that the magnitude of the negative effect of temperature changes is limited by the enterprise nature and the region in which the firm is located. The financial performance of state-owned enterprises, firms in the south and developed regions are more vulnerable to high temperatures. This study provides a policy basis for mitigating the negative effects of temperature changes and provides new empirical evidence for climate governance.