Climate Change and Corporate Operating Risk: Evidence from China

Climate change undermines progress toward sustainable development goals. This paper uses a two-way fixed-effects model to examine whether and how climate change affects firms' operating risk from the perspective of heat exposure. The sample comprises 29,128 firm-year observations of Chinese listed firms for the period 2010 to 2021. The main results are as follows: (1) Increased heat exposure leads to higher corporate operating risk. (2) The impact of heat exposure on operating risk varies on firm characteristics. Specifically, manufacturing firms, small firms, and firms located in less developed cities are more susceptible to heat exposure. (3) The mechanism analysis shows that heat exposure exacerbates operating risk by affecting operating income and inventory management. This paper contributes to prior research on the economic impacts of climate change. In the context of climate change, these findings are of significant value in raising corporate awareness of climate change and motivating corporate involvement in low-carbon initiatives that contribute to climate adaptation and mitigation efforts.