Spillover Effect of Climate Disaster for Management Forecast

Posted by ARC Commitee - Feb 20, 2024
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Climate disasters not only impose substantial economic costs on firms that are directly exposed, but they also generate significant externalities. A comprehensive evaluation of climate disasters requires understanding its consequences, not only for exposed firms, but for other firms as well. In my study “Spillover Effect of Climate Disaster for Management Forecast” (forthcoming at European Accounting Review), I examine whether and how climate disasters hitting product market peers influence management forecasting and strategic planning by firms that were not exposed to significant climate disasters.

Firms do not operate in isolation but sit within a broader system. Product market peers’ climate disasters can generate substantial uncertainty for a focal firm by disturbing its interactions with product markets. Such a shock can distort the role of the focal firm’s accounting system by diminishing the relevance and usefulness of managers’ existing information sets. This, in turn, can constrain forecasting and strategic planning of the focal firm. My paper attempts to identify indirect, spillover effects of climate disasters, which cannot be easily quantified, by examining management forecasts.

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 product market through distorting management forecasts and strategic planning. My study complements the disclosure literature by showing that the uncertainty emerging from the external environment affects management forecast. My findings have practical implications for policy makers and regulators. Consistent with social practice theory suggesting that regulatory interventions can generate positive spillovers across different practices, stringent climate change-related regulatory enforcement can help mitigate the observed negative externalities of climate disasters.

 

This paper is forthcoming at the European Accounting Review – https://www.tandfonline.com/doi/full/10.1080/09638180.2024.2301932

 

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