Firm-level Climate Change Exposure and Cost Structure*

Sera Choi
Korea National Open University
srchoi@knou.ac.kr

Taejin Jung
IE University
taejin.jung@ie.edu

Natalie Kyung Won Kim

IE University
natalie.kim@ie.edu

Sohee Park†
Seoul National University
psh9263@snu.ac.kr

August 2022

*
We received helpful comments from Ewelina Forker (discussant), Pyung Kyung Kang, Woo-Jong Lee, Yong Gyu
Lee, Hyunjin Oh (discussant), Hee-Yeon Sunwoo and seminar participants at the 2022 AAA Annual Meeting, Center
for Social Value Enhancement Studies (CSES), 2022 Korea Accounting Association Annual Conference, and Seoul
National University. This research was supported by the Center for Social Value Enhancement Studies (CSES) of SK
Group. We thank the authors of Sautner, van Lent, Vilkov, and Zhang (2022a) for providing data on the climate change
exposure measure.
†
Corresponding author.

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 Firm-level Climate Change Exposure and Cost Structure

Abstract

We build on prior literature on the role of demand uncertainty in cost structures and examine
whether and how firm cost structures are affected by climate-related issues. Using a measure of
firm-level exposure to climate change identified from earnings conference calls, we find that
climate change exposure reduces the elasticity of sales, general, and administrative (SG&A) costs.
The effect of climate change exposure on cost elasticity is pronounced for firms with positive
demand expectations and for firms in competitive product markets. Lastly, we find that investors
positively react to the inelastic cost structure of firms exposed to climate-related issues. Overall,
this study adds to the debate on the role of climate change in firms’ operational decisions and
provides implications for the real effects of climate-related issues.

Keywords: climate change, cost structure, ESG information, resource adjustment decision

JEL Classifications: G18; M41

Data Availability: Data are available from the public sources cited in the text.

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1. Introduction

Climate change has drawn worldwide attention from societies and businesses around the

world over the last two decades (The New York Times 2022). In the U.S. alone, higher temperature

is expected to cause annual loss of $520 billion across 22 industrial sectors (Martinich and

Crimmins 2019). 1 The material impact of climate change has forced firms to participate in

reducing carbon emissions and global warming (Deloitte 2021). Even though climate change is a

large threat that may lead to substantial costs, it also creates opportunities for firms. For example,

as global consumers show growing interests in eco-friendly products, the market share of electric

cars has increased up to 8.7% in 2021 from 0.2% in 2012 (Wood 2022). To highlight the

importance of a balanced view on the benefits and costs of climate-related issues, the Task Force

on Climate-related Financial Disclosures (TCFD) has developed a framework of climate-related

risks and opportunities.

Prior literature has mainly focused on the new risk brought on by climate change and its

impact on financial markets (e.g., Bolton and Kacperczyk 2021; Matsumura et al. 2014; Sautner

et al. 2022b). However, relatively little is known about the effect of climate change on firms’

operating decisions. This paper attempts to fill this void by exploring the relation between firm-

level climate change exposure and corporate resource commitment decisions.

We use managers’ choice of cost structures as a measure of firms’ resource commitment

decisions. Cost structures reflect one of the most imperative strategic choices of managers as it is

directly linked to current and future profitability (Chang et al. 2021). Managers choose the

elasticity of cost structure (i.e., the proportion of variable-to-fixed costs) depending on their

expectations of future demand (Balakrishnan et al. 2008) and/or uncertainty of future demand

1
According to United Nations Environment Programme (UNEP), the annual cost of adapting to climate change in
developing countries is expected to grow from $70 billion to $140-300 billion by 2030 (Puig et al. 2016).

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(Banker et al. 2014). Following the theoretical grounding of Banker et al. (2014), we posit that

climate change exposure poses significant demand uncertainty to firms, raising the probability of

both unusually low and high demand realizations (Banker et al. 2014).

The effect of climate-driven demand uncertainty on cost structures can be two-fold. On

one hand, firms may choose a less elastic cost structure (i.e., a lower proportion of variable-to-

fixed costs). 2 Banker et al. (2014) argue that unusually high demand realizations incur

disproportionately large congestion costs and empirically show that firms tend to have a rigid cost

structure when demand is uncertain. Climate change causes a long-term shift in the market

environment that would have negative consequences for firms that are unprepared. There would

be severe congestion costs due to limited fixed capacity and firms would lose out on market

opportunities. To the extent that managers consider the potential opportunity costs problematic,

they would exhibit a rigid cost structure to prepare for climate-driven future demand.

On the other hand, managers may strategically choose a more elastic cost structure (i.e., a

higher proportion of variable-to-fixed costs). The traditional belief in managerial accounting is

that, when firms face risks, they increase cost elasticity to gain time to observe demand realizations

before incurring costs (Garrison et al. 2011). If managers choose a rigid cost structure, they become

vulnerable to demand shocks because unused fixed capacity increases financial risks (i.e., they

may not be able to cover their financial obligations) (Holzhacker et al. 2015b). Managers may

prefer an elastic cost structure if climate-related issues are expected to be associated with downside

demand shocks. Therefore, the effect of climate change exposure on firms’ cost structure is an

empirical question.

2
In this paper, we use “less elastic cost structure”, “inelastic cost structure”, and “rigid cost structure” interchangeably.

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 One challenge we face is the estimation of a firm-level exposure to climate change. Prior

studies have primarily relied on either carbon emission intensities or extreme weather events to

proxy for firms’ exposure to climate change. However, the measures focus only on the threats

posed by climate changes. Also, tests using the regional-level proxies fail to capture firm-level

differences, lacking generalizability. We overcome this shortcoming by employing Sautner et al.

(2022a)’s firm-level climate change measure. Sautner et al. (2022a) develops a measure that

captures the proportion of the earnings conference call conversations that address climate-related

topics. This measure captures both the opportunities and the threats brought about by climate

change.

Using a log changes model from Banker et al. (2014) and 31,242 firm-year observations in

Compustat North America from 2002 to 2020, we find that firms facing more climate-related

issues have sales, general, and administrative (SG&A) costs that are less sensitive to changes in

revenues. It indicates that the exposure to climate change leads to inelastic cost structures, possibly

because firms perceive significant congestion risk arising from climate-related demand uncertainty

(Banker et al. 2014). The negative relation between climate change exposure and cost elasticity is

robust to alternative cost measures (e.g., operating costs, number of employees, R&D expenses,

and inventories) and alternative measures of climate-related issues (e.g., firm-level environmental

risks and country-level climate policy uncertainty).

We conduct two cross-sectional tests to strengthen our inferences. First, we investigate the

role of managerial expectations on future demand. If the expected distribution of future demand is

more likely to be skewed to the upside, managers would invest in fixed inputs to reduce congestion

costs (Guiso and Parigi 1999; Banker et al. 2014). The subsample analyses show that the negative

relation between climate change exposure and cost elasticity is more pronounced for firms with

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more positive demand expectation such as firms with government agencies as major customers,

firms with high-ability managers, and firms with optimistic managers.

Second, we examine the effect of suppliers’ product market competition. In a competitive

market, it is crucial to make timely responses to changes in demand for firm survival (Agarwal

and Gort 2002). If firms fail to meet customers’ new demand arising from climate-related issues,

customers would find substitutes and firms would lose customers (Chang et al. 2021; Dhaliwal et

al. 2016; Piccione and Spiegler 2012). To avoid congestion costs, firms would invest in advance

to prepare for possibly high demand. In the subsample analyses, we confirm that firms with a

higher level of climate change exposure exhibit more rigid cost structures when market

competition is high.

Finally, we supplement our tests by analyzing the joint effects of climate change exposure

and rigid cost structure on firm value. We find that investors react positively to managers’ strategic

choice of rigid cost structure when the firms are highly exposed to climate-related issues. The

results suggest that investors perceive the managers’ response of a rigid cost structure to climate

change exposure as a value-increasing behavior.

This study makes several contributions to the literature. First, we contribute to the research

on the effects of climate change. Prior literature has examined the implications of climate-related

issues for capital markets (e.g., Eccles et al. 2011; Chava 2014; Matsumura et al. 2014; Krueger

et al. 2020; Bolton and Kacperczyk 2021; Choy et al 2021), firm performance (Huang et al. 2018),

and reporting practices (Downar et al. 2021). However, relatively little is known about how climate

change exposure affects firms’ operating decisions. Using a new measure introduced by Sautner

et al. (2022a), we provide empirical evidence that the level of climate change exposure affects cost

structure—an essential strategic choice for current and future profitability.

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 We also add to the discussion on the association between uncertainty and cost structure

(Kallapur and Elderburg 2005; Banker et al. 2014; Holzhacker et al. 2015a; 2015b). We extend

Banker et al. (2014)’s findings that higher demand uncertainty leads to a more rigid cost structure

and suggest that climate change exposure is a potential source of demand uncertainty. By showing

the negative association between climate change exposure and cost elasticity, we find that firms

generally perceive climate change exposure not as a factor that decreases downside risks in future

demand but as a factor that increases the overall demand uncertainty.

Lastly, we shed new light on the relation between cost structure and firm value. Despite firms

making strategic resource commitment decisions in response to demand uncertainty, it is hard to

predict whether the firm’s choice increases firm value. We link managers’ cost structure decisions

under climate change exposure to firm value and find that investors react positively to the

managers’ decisions to have a more rigid cost structure.

The rest of this paper is constructed as follows. We review prior studies and develop our

hypothesis in section 2 and describe the data and empirical models in section 3. Section 4 and

section 5 present the results of hypothesis tests and additional tests, respectively. In Section 6, we

conclude the paper.

2. Literature Review and Hypothesis Development

2.1. Literature Review

Prior literature on climate change has mainly focused on the implications for financial

markets. For instance, Eccles et al. (2011) provide evidence that sell-side analysts integrate the

financial implications of carbon emissions into their investment recommendations. Krueger et al.

(2020) provide survey evidence that institutional investors believe climate risks, especially those

related to carbon emissions, are priced in financial markets. With regard to the market pricing of

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climate-related issues, Chava (2014) finds that investors demand high cost of capital when

investing in firms with environmental concerns. Bolton and Kacperczyk (2021) document a carbon

risk premium in which firms with higher carbon emissions have higher expected returns. Ilhan et

al. (2021) find that high carbon intensities are priced in the options market and are associated with

higher downside risk. Lastly, Sautner et al. (2022b) show that firm-level climate change exposure

based on the earnings conference call is priced in the stock market.

Other related studies explore the role of disclosure on climate change information. Using

voluntary carbon disclosure, Matsumura et al. (2014) find that markets penalize firms for carbon

emissions and the penalty is severe for firms that do not disclose their carbon emissions. Downar

et al. (2021) find that mandatory carbon disclosure reduces subsequent emission levels without

hurting financial operating performance. Choy et al. (2021) find that regulatory enforcement and

lenders’ private monitoring discourages firms from releasing toxic chemicals.

Researchers have also documented the effects of climate change risks on firms’ capital

structure. Nguyen and Phan (2020) show that environmental regulation lowers financial leverage

for carbon-intensive firms. Sharfman and Fernando (2008) find that improved environmental risk

management allows firms to take on additional leverage. Other related studies examine how

adverse climatic conditions weaken firm performance (Huang et al. 2018) and financial reporting

quality (Ding et al. 2021).

Despite prior research on the effect of climate change risk, there is little research on how

climate change risk affects firms’ operating choices. Managers make operating decisions by

committing resources based on various constraints, incentives, and psychological biases (Banker

et al. 2018). In this paper, we explore whether and how climate change exposure plays a role in

firms’ operational decisions evident in the cost structure.

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2.2. Hypotheses Development

Banker et al. (2014) suggested that greater demand uncertainty leads to a more rigid cost

structure. Unusually high demand leads to disproportionately large congestion costs (Banker et al.

2014). Congestion costs occur when factor productivity diminishes under high levels of capacity

utilization. As increased congestion costs could make firms miss market opportunity and fall

behind the competition, firms with high demand uncertainty have incentives to increase fixed

capacity to avoid congestion costs and choose a rigid cost structure. In the context of climate

change, exposure to climate change makes it difficult for managers to accurately forecast future

demand realizations. Considering that climate change is a long-term shift in market environment,

firms would find it necessary to make a timely investment to prepare for the future demand.

Therefore, climate change uncertainty could lead to a rigid cost structure.

Other studies have found evidence that uncertainty leads to an elastic cost structure.

Kallapur and Elderburg (2005) examine the role of uncertainty in determining cost structure for

hospital Medicare reimbursements. They provide evidence that as uncertainty increases, firms

choose technologies with low fixed and high variable costs. This phenomenon is explained by real

options theory, suggesting that an elastic cost structure provides hospitals with the option to wait

and observe demand realizations before incurring costs. Holzhacker et al. (2015a) and (2015b)

find similar results in which hospitals adopt a more elastic cost structure under increased demand

uncertainty using German and U.S. data, respectively.

We note that demand uncertainty differs from downside risk (Banker et al. 2014).

Downside risk increases the probability of unfavorable demand realizations; the variance of

demand is higher while the mean of demand is lower. Demand uncertainty only increases the

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variance without affecting the mean; there is a higher likelihood of both unusually high and

unusually low demand realizations. Although the term “uncertainty” is used, Kallapur and

Elderburg (2005) and Holzhacker et al. (2015a; 2015b) examine the effect of downside risk in the

context of the hospital industry. Holzhacker et el. (2015b) state that for hospitals, the impact of

downside risk (i.e., the risk of financial default if demand decreases) exceeds the impact of

congestion risk when demand increases. This is because hospitals typically maintain excess

capacity to avoid congestion. 3 In short, increased downside risk—not increased demand

uncertainty—may lead to a less rigid cost structure in the context of hospitals.

Also, in publicly traded firms such as our setting and Banker et al. (2014), managers are

commonly incentivized with equity-based pay including stock options. Stock options bind the

losses from extremely low realizations of demand while allowing for potentially unlimited gains

from a high realization of demand. Such incentive schemes increase the attractiveness of a more

rigid cost structure, which allows a higher operating leverage effect. In contrast, hospital managers

are likely to have bonuses tied to accounting performance measures. Thus, in the presence of

demand uncertainty for hospitals, a less rigid cost structure with low fixed and high variable costs

would be preferable to break even.

Nonetheless, managers of public firms may also strategically choose an elastic cost

structure. This view is consistent with the managerial accounting textbook which documents that

managers prefer a more elastic cost structure when they are under greater downside risk (Garrison

et al. 2011). Due to the leverage effect of fixed capacity, firms having rigid cost structures would

be vulnerable to demand shocks and fall short of resources to cover their financial obligations

3
Congestion leads to higher mortality and may lead to litigations. Hospitals would also suffer from reputation loss
for turning way patients due to insufficient capacity (Balakrishnan and Soderstrom 2000).

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(Holzhacker et al. 2015b). Therefore, if climate-related issues significantly distort future demand,

managers would prefer to have elastic cost structures.

Combining the two conflicting arguments, we state our hypothesis in a null form:

Hypothesis. Climate change exposure at the firm-level is not significantly related to the

cost structure.

3. Sample and Research Design

3.1 Firm-level Measure of Climate Change Exposure

We capture firm-level climate change exposure using Sautner et al. (2022a)’s measure. Using

the machine learning keyword discovery algorithm proposed by King et al. (2017), Sautner et al.

(2022a) identify word combinations that signal climate change conversations in the earnings

conference calls transcripts. 4 Next, they count the bigrams related to climate change in the

transcripts and scale it by the total number of bigrams to construct the aggregated measure of firm-

level climate change (CCExpo).

They also construct detailed measures of exposure to climate change. The “sentiment”

measures capture whether climate change exposure represents good or bad news for the firm using

the relative frequency of climate change bigrams that occur in the vicinity of positive and negative

tone words (Loughran and McDonald 2011). For our analyses, we use a net measure (CCSenti)

that is calculated as the relative frequency of positive mentions minus the relative frequency of

negative mentions. The “topic” measures capture the mentions about specific climate topics:

opportunity (CCOpp), regulatory shocks (e.g., carbon taxes and caps) (CCReg), and physical

shocks (e.g., sea level rises and natural disasters) (CCPhy). We use these measures to explore how

4
The transcripts of earnings conference calls are effective in identifying firms’ various risks and opportunities
(Hassan et al. 2019).

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perceived climate change exposure affects firms’ resource adjustment decisions. 5 Appendix B

provides examples of bigrams that are used to estimate the firm-level climate change exposure.

3.2 Regression Model

We develop the following Equation (1) based on prior literature on cost behavior (e.g.,

Banker et al. 2014; Holzhacker et al. 2015a, 2015b):

ΔlnSGAi,t = α0 + (α1 + α2CCEXPOi,t + α3ASSETINTi,t + α4EMPINTi,t + α5SIZEi,t

+ α6UNCERTAINTYi,t + α7GDPGROWTHi,t) × ΔlnSALEi,t + α8CCEXPOi,t
+ α9ASSETINTi,t + α10EMPINTi,t + α11SIZEi,t+ α12UNCERTAINTYi,t
+ α13GDPGROWTHi,t + Year FE + Industry FE + εi,t, (1)
where i indicates firms and t indicates years. The model is based on a linear relation between log

changes in SG&A costs (ΔlnSGA) and concurrent log changes in sales (ΔlnSALEi,t). The coefficient

on ΔlnSALEi,t is the percentage change in costs for a percentage change in sales and characterizes

the degree of cost rigidity. Following prior studies, we allow the coefficients to vary with economic

determinants of cost rigidity. CCEXPOi,t is the variable of interest that captures firm-level climate

change exposure. If α2 is positive (negative), greater exposure to climate change is associated with

a more (less) elastic short-run cost structure.

We further control for the following factors: asset intensity calculated as the log ratio of assets

to sales (ASSETINTi,t); employee intensity calculated as the log ratio of the number of employees

to sales (EMPINTi,t); firm size calculated as the log of total assets (SIZEi,t); uncertainty calculated

as the standard deviation of ΔlnSALE (UNCERTAINTYi,t); and the aggregate trends in the economy

calculated as GDP growth rate (GDPGROWTHi,t). We estimate the model with industry and year

5
Sautner et al. (2022a) validate their measure using a firm’s carbon intensity and carbon risk rating, two alternative
measures of firm-level exposure to climate change.

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fixed effects and report t-statistics based on standard errors adjusted for firm clustering (Petersen

2009).

3.3 Data and Sample Selection

Table 1 Panel A reports the sample selection procedure. Our initial sample consists of U.S.

publicly listed companies from 2002 to 2020.6 We exclude observations from financial and utility

industries with SIC codes of 6000-6999 and 4900-4999. We delete observations with (1) SG&A

expense larger than sales revenue, (2) extreme change in sales revenue, (3) missing climate change

exposure variables, or (4) missing accounting variables required in the main analyses. We deflate

all financial variables using GDP deflator to control for changes in aggregate price level. We obtain

firm-level financial and accounting data from Compustat North America. The inflation rate and

GDP growth rate are extracted from World Bank. For firm-level climate change exposure variables,

we rely on the data provided by Sautner et al. (2022a).7 To mitigate the effect of outliers, we

winsorize observations at the 1% and 99% level for all continuous variables. The final sample

consists of 31,242 firm-year observations.

Table 1 Panel B shows the sample distribution by year. The number of observations by year

ranges from 1,077 (in 2002) to 1,803 (in 2012). The mean value of CCEXPO by year shows a

slightly increasing trend from the lowest value of 0.040 in year 2002 to the highest value of 0.102

in year 2020. The median value of CCEXPO increases from 0.000 in the early years to 0.035 in

year 2020.

<Insert Table 1 here>

6
The sample period for the Sautner et al. (2022a) measure of climate change exposure is from 2002 to 2020.
7
For sensitivity tests using alternative climate change measures, we use a firm-level environmental risk proxy
constructed by Hassan et al. (2019) and U.S. climate policy uncertainty index constructed by Gavriilidis (2021).

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4. Empirical Results

4.1 Summary Statistics

Table 2 Panel A presents the descriptive statistics. The mean value of ΔlnSALE is 0.020,

suggesting that firms on average experience an increase in sales revenue during the sample period.

Correspondingly, the mean value of ΔlnSGA (ΔlnOPCOST) is 0.021 (0.021), showing that

operating costs tend to be adjusted according to change in sales. The mean and median value of

CCEXPO is 0.070 and 0.028, indicating that the small number of firms with high climate change

exposure drives the right-skewed distribution.

Table 2 Panel B tabulates the correlation matrix where the lower left and upper right triangles

represent Pearson and Spearman correlation coefficients, respectively. As expected, ∆lnSALE has

a positive and significant correlation with ∆lnSGA. CCEXPO is negatively associated with

∆lnSALE and ∆lnSGA. ∆lnSGA is also significantly associated with most of the economic

determinants controlled in the model: ASSETINT, EMPINT, SIZE, UNCERTAINTY, and

GDPGROWTH.

Table 2 Panel C shows the univariate comparison between the firms with and without climate

change exposure. On average, firms with climate change exposure have a slightly greater value in

the increase in SG&A expenses (∆lnSGA), higher asset intensity (ASSETINT), lower employee

intensity (EMPINT), greater size (SIZE), less uncertainty (UNCERTAINTY), and lower GDP

growth rate (GDPGROWTH) than firms with no climate change exposure. To address the concerns

about the underlying differences between firms with and without climate change exposure, in

Section 5.2, we conduct additional tests using matched sample based on the key variables.

<Insert Table 2 here>

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4.2 Main Results

Table 3 presents the results of estimating the Equation (1). Column (1) first shows the

baseline results without the effect of CCEXPO. The coefficients on the interaction term between

∆lnSALE and control variables are generally consistent with prior studies (Banker et al. 2014;

Holzhcker et al. 2015a). In Column (2), the results include the effect of CCEXPO and show that

the coefficient on ∆lnSALE×CCEXPO is negative and significant, suggesting that greater climate

change exposure brings in a more rigid cost structure. We find similar results in Column (3) where

we regress Equation (1) only for firms with a positive value in CCEXPO. The results imply that,

when facing the long-term trend of climate change, firms would perceive potential congestion

costs as substantial and strategically increase fixed capacity to relieve congestion in case of high

demand realization.

<Insert Table 3 here>

4.3 Sensitivity Tests

Table 4 Panel A reports the results of estimating the Equation (1) using alternative cost

measures as dependent variables. If managers are concerned about potential congestion costs at

high demand levels, then the resulting cost rigidity would also occur in different cost measures

other than SG&A costs. In Column (1), we examine the effect on the log change in operating costs,

i.e., the difference between sales and operating income after depreciation. In Columns (2)-(4), the

dependent variable is the log change in the number of employees, the log change in R&A expenses,

and the log change in inventory, respectively. In all four columns, we find negative and significant

coefficients on ∆lnSALE×CCEXPO.

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 In Table 4 Panel B, we conduct other sensitivity tests. In Columns (1) an (2), we use

alternative measures for climate change exposure. One measure is a firm-level environment-

related political risk (ENVRISK) based on earnings conference calls constructed by Hassan et al.

(2019). The other measure is a national-level climate policy uncertainty index (CPU) constructed

by Gavriilidis (2021) which is based on news from major U.S. newspapers. We find a negative

and significant coefficient on ∆lnSALE×ENVRISK in Column (1) and a negative and insignificant

coefficient on ∆lnSALE×CPU in Column (2). Although the evidence using the national-level

measure is weak, the overall results provide support for the association between climate change

exposure and cost rigidity.

In Columns (3) and (4), we use alternative model specifications. In Column (3), we follow

Banker et al. (2014) and include the industry-specific slopes on ∆lnSALE by controlling for

Industry Dummies×∆lnSALE in the model. In Column (4), we replace industry fixed effects with

firm fixed effects to further mitigate the concerns of endogeneity. The negative and significant

coefficients on ∆lnSALE×CCEXPO in both columns confirm that our results are robust to the other

model specifications.

<Insert Table 4 here>

4.4 Topical/Sentimental Analysis

Notably, the aspect of climate change exposure would differ across firms. Some firms see

market opportunities in the climate change period, for example, if they have developed innovations

that facilitate low-carbon transition. Other firms face market threats in the same period if their

customer firms decide to change their business models due to the physical risks caused by sudden

temperature rise. While our prior analyses show that aggregated climate change exposure has, on

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average, a negative association with cost elasticity, different patterns could be manifested

depending on the detailed context where climate change is mentioned in conference calls.

To distinguish the role of the detailed context, we test the effects of topical and sentimental

climate change variables on cost rigidity. Topic measures capture the frequency of specific climate

change related topics: opportunities (CCOPP), regulatory shocks (CCREG), and physical shocks

(CCPHY). The sentiment measure captures the degree to which climate change exposure

represents good news to a firm relative to bad news (CCSENTI). We expect that the reported cost

rigidity would be manifested for firms that have discussed about future opportunities from climate

change and for firms that show positive sentiment in climate-related discussion.8

Table 5 shows the test results of using topic measures and a sentiment measure in Column

(1) and Column (2), respectively. In Column (1), we find negative and significant coefficients on

∆lnSALE×CCOPP. In other words, firms increase cost rigidity when there are new opportunities

related to climate change. The coefficient on ∆lnSALE×CCPHY is insignificant because the

physical shocks mentioned in the conference calls are rarely interpreted as good news. In Column

(2), we find that firms with more positive sentiment about climate change tend to exhibit more

rigid cost structures. Overall, our results support the assumption that the association between

climate change exposure and cost structure is driven by the concerns about future demand

realization.

<Insert Table 5 here>

5. Additional Analyses

8
We are cautious about the interpretation of the coefficient on ∆lnSALE× CCREG. It is not straightforward to make a
prediction whether the discussion on regulation-related climate issues affects future demand uncertainty in a positive
or negative way.

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5.1 Cross-sectional Analyses

To further our understanding about the relation between climate change exposure and

managerial decisions on cost structures, we conduct two cross-sectional tests. First, we investigate

the effect of managerial expectation about future demand. The more a firm anticipates that the

climate change positively affects future demand, the more likely the firm will invest in fixed inputs

to mitigate the concerns about congestion costs (Banker et al. 2014). To test the prediction, we use

three proxies for the expectation about future demand: the existence of government agencies in the

list of major customers (GOVCUSTOMER), the degree of managerial ability (MGTABILITY), and

the degree of managerial optimism (OPTIMISM). Firms that serve government agencies would be

encouraged to invest in fixed capacity to enable the long-term supply of pro-eco products and

services. Firms with more capable managers can better exploit the market opportunities and

anticipate a greater increase in future demand amid uncertainty (Demerjian et al. 2012). Lastly,

more optimistic managers are more likely to prepare for abnormally high demand. Thus, firms

with these characteristics are more likely to invest in fixed inputs when they face demand

uncertainty derived by climate change exposure.

Table 6 presents the results of cross-sectional tests where we divide the sample based on the

expectation of future demand. Columns (1) and (2), Columns (3) and (4), and Columns (5) and (6)

compare the relationship between climate change exposure and cost rigidity depending on whether

a firm generates a large portion of its sales revenue from government customers, whether its

managers have high ability, and whether its managers are optimistic, respectively. As expected,

we find that the coefficients on ∆lnSALE×CCEXPO have larger magnitude for firms with a more

positive outlook on future demand.

<Insert Table 6 here>

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 Next, we examine the effect of market competition. In a competitive market, products and

services can be easily substituted (Dhaliwal et al. 2016), implying that the late response to market

changes causes significant loss of market competitiveness. In this regard, congestion costs are

larger for firms that face stronger product market competition (Chang et al. 2021). By weighing

more on the cost of losing market share than the cost of having nondeployable fixed inputs, firms

in more competitive industries are more likely to increase the cost rigidity in response to the

climate change exposure. To test the prediction, we follow Chang et al. (2021) and use three

proxies for product market competition: the Herfindahl-Hirschman Index (HHI), product market

total similarity score (SIMILARITY), and product market fluidity score (FLUIDITY).

Table 7 presents the results of cross-sectional tests where we divide the sample based on

product market competition. Columns (1) and (2), Columns (3) and (4), and Columns (5) and (6)

compare the effect of climate change exposure on cost rigidity depending on the sample median

of HHI, SIMILARITY, and FLUIDITY, respectively. As expected, we find that the coefficients on

∆lnSALE×CCEXPO are larger for the firms with stronger market competition. Except for the tests

using FLUIDITY, the coefficients of interest for firms in more competitive markets are statistically

different at the 10% level from those for firms in less competitive markets. Taken together, our

findings are consistent with expectations that higher market competition strengthens the relation

between climate change exposure and rigid cost structures.

<Insert Table 7 here>

5.2 Endogeneity-related Concerns

While we provide empirical evidence that firms facing high climate change exposure tend to

have a rigid cost structure, the univariate comparison in Table 2 Panel B raises endogeneity

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concerns. To address the possibility that the reported results are driven by endogenous firm

characteristics, we conduct two robustness tests. First, we use an instrument variable analysis. As

our model depends on the endogenous variables that are interacted, we follow the method used in

Field et al. (2013) and employ a separated first stage regression. As an instrumental variable for

climate change exposure, we use the climate change exposure measure for supplier firms

(CCEXPO_SUPPLIER), which is closely associated with the focal firm’s climate change exposure

but not with the focal firm’s sales or SG&A costs.

Table 8 Panel A shows the results of conducting the instrumental variable analysis. In

Column (2), we find that ∆lnSALE×CCEXPO_SUPPLIER has a positive and significant

association with ∆lnSALE×CCEXPO, which ensures the validity of using the climate change

exposure of supplier firms as an instrumental variable for the focal firm’s climate change exposure.

Using the expected value of ∆lnSALE×CCEXPO in Column (3), we confirm that its coefficient

remains negative and significant, providing support for our main regression results.

Next, we use a matched sample analysis using propensity score matched sample (PSM) and

entropy balanced sample to mitigate concerns that differences in other firm characteristics drive

our main results. We use the dummy variable (CCEXPO_D) which equals to one if the firm has

positive value in CCEXPO, and zero otherwise. For PSM, we estimate the likelihood of a firm

being exposed to climate change using other control variables in Equation (1) and match

observations on propensity score using a caliper distance of 0.05 without replacement. Table 8

Columns (1) and (2) show the first and second stage of PSM, respectively. As reported in Column

(2), the results using the PSM sample are consistent with our main results with a significant and

negative coefficient on ∆lnSALE×CCEXPO_D. Table 8 Column (3) shows the results using an

entropy balanced sample (Hainmueller 2012; Chapman et al. 2019). We continue to find that the

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coefficient on ∆lnSALE×CCEXPO_D is negative and significant in the sample, providing further

evidence on the relationship between climate change exposure and cost rigidity.

<Insert Table 8 here>

5.3 Supplementary Tests: Firm Value Implications

As supplementary tests, we test whether an increase in cost rigidity due to climate change

exposure is beneficial to firm value. While prior studies suggest that demand uncertainty leads to

more rigid (Banker et al. 2014) or less rigid (Holzhacker et al. 2015a; 2015b) cost structures, they

are relatively silent about its value implication. Novy-Marx (2011) shows that the stock portfolio

sorted by the operating leverage (the degree of fixed costs) predicts returns in the cross-section.

The findings of Novy-Marx (2011) imply that investors incorporate information contained in

managers’ cost structure choices. To obtain the firm value implication, we follow Ma et al. (2021)

and examine the interactive effect of climate change exposure and SG&A cost rigidity on future

Tobin’s Q (TOBINQ). To measure firm-year level SG&A cost rigidity, we estimate the empirical

model using a firm’s most recent 12 quarters data and use the negative of estimated 𝛽1 as a proxy

for SG&A cost rigidity (SGARIGIDITY): ∆lnSGAt = β0 + β1∆LnSALEt + μt. If the higher cost

rigidity in accordance with climate change exposure increases firm value, we would find a positive

and significant coefficient on CCEXPO×SGARIGIDITY.

Table 9 presents the results of regressing future Tobin’s Q on climate change exposure,

SG&A cost rigidity, their interaction term, and other control variables. In Column (1) to (3), we

use TOBINQ of year t+1 to year t+3, respectively, as a dependent variable. Across the three

Columns, we find that the coefficients on CCEXPO×SGARIGIDITY are all positive and significant,

suggesting that the increase in cost rigidity due to climate change exposure increases long-term

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firm value. Thus, we confirm that increasing fixed inputs when facing climate change uncertainty

may benefit future firm value by reducing congestion costs.

<Insert Table 9 here>

6. Conclusion

Climate change impacts every aspect of the world. Government agencies in many countries

are taking steps to reduce greenhouse gas emissions; individuals are looking for eco-friendly

products and services to help mitigate global warming. Amid the worldwide movement to deal

with climate change, there are much attention toward the responses of business leaders to the

fundamental change. Nevertheless, the academic debate over the impact of climate change on

corporations are largely limited to financial markets consequences.

This paper makes an attempt to explore the effect of climate change on firms’ operational

decisions by focusing on cost structure. As the long-term climate change significantly increases

market uncertainty, firms would adjust the degree of resource commitment based on a cost-benefit

analysis. In the empirical results, we find that firms tend to respond to climate change exposure by

increasing cost rigidity and the tendency is more pronounced for firms with more positive demand

expectation and firms in more competitive market. We believe our findings have meaningful

implications for the debate over the role of climate change in corporate environment and broaden

our understanding about firms’ responses to the rapidly changing business environment.

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 APPENDIX A. VARIABLE DEFINITIONS

Variable Definition
ΔlnSALE = Change in the natural logarithm of sales revenue in year t relative to the natural
logarithm of sales revenue in year t-1;
ΔlnSGA = Change in the natural logarithm of selling, general, and administrative costs
in year t relative to the natural logarithm of selling, general, and administrative
costs year t-1;
CCEXPO = Relative frequency with which bigrams related to climate change occur in the
transcripts of analyst conference calls, where the number of such bigrams is
divided by the total number of bigrams in the transcripts. The measure is
multiplied by 100 to indicate the percentage term;
ASSETINT = The ratio of total assets to sales revenue in year t;
EMPINT = The ratio of the number of employees to sales revenue in year t;
SIZE = The natural logarithm of total assets in year t;
UNCERTAINTY = Demand uncertainty, computed as the standard deviation of ΔlnSALE for all
valid observations of firm i;
GDPGROWTH = The growth in annual GDP (http://www.bea.gov/briefrm/gdp.htm);
ΔlnOPCOST = Change in the natural logarithm of operating costs in year t relative to the
natural logarithm of operating costs in year t-1. Operating costs is measured
as the difference between sales and operating income after depreciation.;
ΔlnEMP = Change in the natural logarithm of the number of employees in year t relative
to the natural logarithm of the number of employees in year t-1;
ΔlnRD = Change in the natural logarithm of research and development (R&D) expenses
in year t relative to the natural logarithm of R&D expenses in year t-1;
ΔlnINVT = Change in the natural logarithm of inventory in year t relative to the natural
logarithm of inventory in year t-1;
ENVRISK = A firm-level environmental risk proxy constructed by Hassan et al. (2019);
CPU = U.S. climate policy uncertainty index constructed by Gavriilidis (2021);
CCOPP = Relative frequency with which bigrams that capture opportunities related to
climate change occur in the transcripts of analyst conference calls, where the
number of such bigrams is divide by the total number of bigrams in the
transcripts. The measure is multiplied by 100 to indicate the percentage term;
CCREG = Relative frequency with which bigrams that capture regulatory shocks related
to climate change occur in the transcripts of analyst conference calls, where
the number of such bigrams is divide by the total number of bigrams in the
transcripts. The measure is multiplied by 100 to indicate the percentage term;
CCPHY = Relative frequency with which bigrams that capture physical shocks related
to climate change occur in the transcripts of analyst conference calls, where
the number of such bigrams is divide by the total number of bigrams in the
transcripts. The measure is multiplied by 100 to indicate the percentage term;
CCSENTI = Relative frequency with which bigrams related to climate change are
mentioned together with the positive tone words in one sentence in the
transcripts of analyst conference calls minus the relative frequency of related
bigrams mentioned together with the negative tone words, where the net
number of such bigrams is divided by the total number of bigrams in the
transcripts; tone words are summarized by Loughran and McDonald (2011).
The measure is multiplied by 100 to indicate the percentage term;
GOVCUSTOMER = An indicator variable that equals 1 for firms with major government
customers, and 0 otherwise;

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MGTABILITY = Managerial ability score constructed by Demerjian et al. (2012);
OPTIMISM = An indicator variable that equals 1 if the cumulative shares retained by a CEO
on days with option exercise during a fiscal year exceeds 1% and 0 otherwise,
as defined by Sen and Tumarkin (2015);
HHI = Herfindahl-Hirschman Index, calculated using two-digit SIC codes;
SIMILARITY = Total similarity score for firm i in year t using pairwise comparisons of
product descriptions from 10-K data, as defined by Hoberg and Phillips
(2016);
FLUIDITY = Product market fluidity score for firm i in year t using product description
comparisons from 10-K data, as defined by Hoberg et al. (2014);
CCEXPO_SUPPLIER = CCEXPO of dependent supplier firms.
TOBINQ = Tobin’s Q, defined as market value of equity plus book value of assets minus
book value of equity divided by book value of total assets;
SGARIGIDITY = Firm-level measure of cost rigidity. To calculate cost rigidity for firm i in year
t, we first estimate the following empirical model using the most recent 12
quarters of data (year t-2 to year t): ΔlnSGA = β0 + β1× ΔlnSALE + μ,
SGARIGIDITY is defined as the negative of β1;
LEVERAGE = Sum of long-term debt and debt in current liabilities divided by total assets;
CASH = Cash and cash equivalents scaled by total assets;
ROA = Income before extraordinary items scaled by lagged total assets;
RD = Research and development expenses scaled by lagged total assets;
CAPEX = Capital expenditures scaled by lagged total assets;
TANGIBILITY = Net property, plant, and equipment divided by total assets;
Notes: This table presents detailed definitions of variables used in this paper.

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 APPENDIX B. Top-100 Biagrams Captured by Climate Change Exposure

Bigrams Freq. Bigrams Freq. Bigrams Freq.

renewable energy 15,605 onshore wind 878 carbon intensity 641
electric vehicle 9,508 electric motor 869 energy application 615
clean energy 6,430 provide energy 851 produce electricity 604
new energy 4,544 efficient solution 839 help state 604
climate change 4,374 global warm 837 environmental standard 593
wind power 4,253 power generator 828 power agreement 586
wind energy 4,035 solar pv 827 supply energy 585
energy efficient 3,899 scale solar 827 electric hybrid 585
greenhouse gas 3,416 need clean 821 source power 575
solar energy 2,511 coastal area 816 sustainability goal 572
air quality 2,409 energy star 793 energy reform 571
clean air 2,301 environmental footprint 792 plant power 564
carbon emission 2,088 design use 777 compare conventional 560
gas emission 1,910 area energy 777 gas vehicle 560
extreme weather 1,773 charge station 762 effort energy 560
carbon dioxide 1,583 clean water 759 pass house 559
water resource 1,423 major design 747 carbon free 558
autonomous vehicle 1,394 vehicle manufacturer 740 driver assistance 545
energy environment 1,279 future energy 737 electrical energy 543
wind resource 1,245 motor control 726 solar installation 541
government india 1,201 combine heat 718 snow ice 538
battery power 1,147 electric bus 709 renewable natural 536
air pollution 1,127 distribute power 703 promote use 536
battery electric 1,121 environmental benefit 695 farm project 531
integrate resource 1,052 eco friendly 695 laser diode 528
clean power 1,008 electrical vehicle 695 deliver energy 526
carbon price 999 carbon neutral 690 protect environment 525
world population 977 fast charge 675 sustainable energy 523
solar farm 971 cell power 657 manage energy 522
energy regulatory 967 energy team 650 invest energy 521
obama dministration 957 cycle gas 646 electric energy 519
heat power 941 coal gasification 643 forest land 512
carbon tax 928 environmental concern 643 capacity energy 512
unite nation 925
Notes: This table shows the top 100 bigrams used to estimate CCEXPO. For detailed description, see Table 2 from
Sautner et al. (2022a).

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 TABLE 1. Sample
Panel A. Sample Selection
Firm-years observations for the sample period of 2002-2020 from COMPUSTAT 154,626
Less:
Firm-years in financial and utility industry (64,832)
Firm-years with SG&A expenses greater than sales revenue (21,236)
Firm-years with extreme change in sales revenue (18,703)
Firm-years without climate change exposure variables (16,337)
Firm-years without other accounting variables required in the main analyses (2,276)
Final sample 31,242

Panel B. Sample Distribution by Year

Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Observations 1,077 1,441 1,591 1,673 1,726 1,760 1,830 1,735 1,711 1,802
Mean
0.040 0.044 0.044 0.052 0.057 0.063 0.072 0.079 0.075 0.077
(CCEXPO)
Median
0.000 0.000 0.000 0.022 0.024 0.027 0.031 0.028 0.025 0.029
(CCEXPO)
Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 Total
Observations 1,803 1,733 1,760 1,615 1,546 1,648 1,651 1,652 1,488 31,242
Mean
0.078 0.072 0.072 0.070 0.074 0.081 0.080 0.085 0.102 0.069
(CCEXPO)
Median
0.030 0.027 0.030 0.028 0.029 0.030 0.030 0.033 0.035 0.028
(CCEXPO)
Notes: Table 1 describes the sample used in the analyses. Panel A summarizes the sample selection procedure. Panel
B reports the sample distribution by year.

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 TABLE 2. Summary Statistics
Panel A. Descriptive Statistics
Variable N Mean STD P10 Q1 MED Q3 P90
ΔlnSALE 31,242 0.020 0.136 -0.148 -0.055 0.018 0.099 0.197
ΔlnSGA 31,242 0.021 0.135 -0.133 -0.052 0.016 0.092 0.185
CCEXPO 31,242 0.070 0.138 0.000 0.000 0.028 0.075 0.180
ASSETINT 31,242 1.281 0.877 0.474 0.686 1.041 1.587 2.362
EMPINT 31,242 0.007 0.007 0.002 0.003 0.005 0.008 0.013
SIZE 31,242 6.533 1.791 4.214 5.349 6.500 7.695 8.856
UNCERTAINTY 31,242 0.230 0.198 0.066 0.107 0.176 0.275 0.439
GDPGROWTH 31,242 0.018 0.017 0.001 0.017 0.023 0.028 0.035
ΔlnOPCOST 30,889 0.021 0.128 -0.133 -0.051 0.016 0.092 0.184
ΔlnEMP 30,953 0.034 0.184 -0.120 -0.036 0.024 0.097 0.202
ΔlnRD 16,083 0.026 0.229 -0.210 -0.077 0.021 0.129 0.269
ΔlnINVT 25,195 0.048 0.291 -0.212 -0.063 0.048 0.163 0.317
ENVRISK 31,082 2,971.9 3,903.5 368.0 808.0 1,668.3 3,443.4 6,723.3
CPU 31,242 102.72 59.35 32.93 61.51 90.87 128.15 195.36
CCOPP 31,242 0.024 0.063 0.000 0.000 0.000 0.024 0.067
CCREG 31,242 0.003 0.013 0.000 0.000 0.000 0.000 0.000
CCPHY 31,242 0.001 0.005 0.000 0.000 0.000 0.000 0.000
CCSENTI 31,242 0.017 0.064 0.000 0.000 0.000 0.000 0.071
GOVCUSTOMER 16,882 0.067 0.249 0.000 0.000 0.000 0.000 0.000
MGTABILITY 27,513 -0.002 0.133 -0.122 -0.080 -0.032 0.037 0.160
OPTIMISM 9,138 0.565 0.496 0.000 0.000 1.000 1.000 1.000
HHI 31,242 0.077 0.082 0.026 0.032 0.045 0.084 0.167
SIMILARITY 28,886 2.842 4.187 1.014 1.101 1.480 2.815 5.511
FLUIDITY 28,882 6.642 3.400 3.029 4.284 6.084 8.219 10.655
CCEXPO_SUPPLIER 2,890 0.035 0.063 0.000 0.004 0.015 0.039 0.082
TOBINQ 20,070 2.130 1.302 1.031 1.282 1.728 2.508 3.737
SGARIGIDITY 20,070 -0.443 0.521 -1.028 -0.684 -0.395 -0.163 0.064
LEVERAGE 20,070 0.211 0.208 0.000 0.015 0.174 0.327 0.493
CASH 20,070 0.195 0.178 0.020 0.054 0.139 0.289 0.471
ROA 20,070 0.030 0.110 -0.106 -0.005 0.045 0.088 0.137
RD 20,070 0.057 0.070 0.000 0.004 0.028 0.087 0.154
CAPEX 20,070 0.043 0.042 0.010 0.017 0.030 0.053 0.090
TANGIBILITY 20,070 0.206 0.176 0.039 0.076 0.151 0.282 0.455

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Panel B. Correlation Matrix
(1) (2) (3) (4) (5) (6) (7) (8)
(1) ΔlnSALE 0.649 -0.010 0.055 -0.069 0.018 -0.013 0.081
<0.001 0.066 <0.001 <0.001 0.001 0.023 <0.001
(2) ΔlnSGA 0.619 -0.010 0.073 -0.025 0.014 -0.032 0.046
<0.001 0.078 <0.001 <0.001 0.011 <0.001 <0.001
(3) CCEXPO -0.024 -0.019 0.045 -0.080 0.088 0.032 -0.036
<0.001 0.001 <0.001 <0.001 <0.001 <0.001 <0.001
(4) ASSETINT 0.048 0.073 0.013 -0.111 0.240 0.178 -0.023
<0.001 <0.001 0.025 <0.001 <0.001 <0.001 <0.001
(5) EMPINT -0.040 -0.014 -0.074 -0.137 -0.197 -0.190 0.002
<0.001 0.011 <0.001 <0.001 <0.001 <0.001 0.667
(6) SIZE 0.034 0.030 -0.003 0.242 -0.147 -0.238 -0.004
<0.001 <0.001 0.633 <0.001 <0.001 <0.001 0.508
(7) UNCERTAINTY -0.002 -0.029 0.031 0.151 -0.095 -0.233 0.003
0.682 <0.001 <0.001 <0.001 <0.001 <0.001 0.653
(8) GDPGROWTH 0.110 0.063 -0.059 -0.038 -0.006 0.005 0.002
<0.001 <0.001 <0.001 <0.001 0.293 0.390 0.691

Panel C. Univariate Comparison

CCEXPO>0 CCEXPO=0 Median
Variable Mean diff.
(N=16,558) (N=14,684) diff.
Wilcoxon
t-test
Mean Median Mean Median rank test
(p-value)
(p-value)
0.001 0.003
ΔlnSALE 0.021 0.020 0.020 0.017
(0.517) (0.165)
0.003* 0.004*
ΔlnSGA 0.022 0.018 0.019 0.014
(0.071) (0.067)
0.067*** 0.080***
ASSETINT 1.312 1.078 1.245 0.998
(<0.001) (<0.001)
-0.001*** -0.001***
EMPINT 0.007 0.005 0.008 0.006
(<0.001) (<0.001)
0.498*** 0.518***
SIZE 6.767 6.747 6.269 6.229
(<0.001) (<0.001)
-0.006*** 0.002
UNCERTAINTY 0.227 0.177 0.233 0.175
(0.006) (0.152)
-0.001*** 0.000***
GDPGROWTH 0.017 0.023 0.018 0.023
(<0.001) (<0.001)
Notes: *, **, *** indicate significance at the 10 percent, 5 percent, and 1 percent levels, respectively (two-tailed).
Table 2 presents the summary statistics for the variables used in the analyses. Panel A shows the descriptive statistics
for the variables. Panel B shows the correlation matrix where the upper right and under left triangles tabulate the
Spearman and Pearson correlation coefficients, respectively. Panel C shows the univariate comparison between firms
with climate change exposure and firms without climate change exposure. Variable definitions are provided in the
Appendix A.

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 TABLE 3. Firm-level Climate Change Exposure and Cost Structure
Dep. Variable = ΔlnSGA
Positive CCEXPO
Benchmark Full Sample
sample
(1) (2) (3)
ΔlnSALE 0.553*** 0.579*** 0.588***
(16.47) (17.30) (13.32)
ΔlnSALE×CCEXPO -0.258*** -0.201***
(-6.81) (-4.83)
ΔlnSALE×ASSETINT -0.040*** -0.040*** -0.032***
(-4.64) (-4.71) (-2.84)
ΔlnSALE×EMPINT 4.720*** 4.372*** 6.725***
(4.26) (3.95) (4.31)
ΔlnSALE×SIZE 0.020*** 0.020*** 0.013**
(4.13) (4.14) (2.19)
ΔlnSALE×UNCERTAINTY -0.200*** -0.195*** -0.265***
(-5.30) (-5.27) (-5.68)
ΔlnSALE×GDPGROWTH 1.030*** 0.864*** 1.287***
(3.68) (3.09) (3.34)
CCEXPO 0.001 -0.008
(0.11) (-1.39)
ASSETINT 0.012*** 0.012*** 0.012***
(10.09) (9.92) (7.73)
EMPINT 0.107 0.124 0.274
(0.90) (1.05) (1.63)
SIZE -0.001* -0.001** -0.002***
(-1.96) (-1.98) (-2.74)
UNCERTAINTY -0.018*** -0.018*** -0.018***
(-3.78) (-3.83) (-2.92)
GDPGROWTH -0.020 -0.013 -0.087*
(-0.55) (-0.36) (-1.73)

Fixed effects Year, Industry Year, Industry Year, Industry

Observations 31,242 31,242 16,558
Adjusted R2 0.395 0.397 0.375
Notes: *, **, *** indicate significance at the 10 percent, 5 percent, and 1 percent levels, respectively (two-tailed).
Table 3 presents the regression results of estimating the Equation (1). Column (1) shows the benchmark results without
including the effect of climate change exposure. The results with including the effect of climate change exposure in
Column (2), and the results based on subsample of firms with positive value in CCEXPO. All continuous variables
are winsorized at the top and bottom one percentile. t-statistics based on standard errors clustered by firm are shown
in parentheses. Variable definitions are provided in the Appendix A.

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 TABLE 4. Sensitivity Tests
Panel A. Alternative Cost Measures
Dep. Variable = ΔlnOPCOST ΔlnEMP ΔlnRD ΔlnINVT
Operating Costs Employees R&D Expense Inventory
(1) (2) (3) (4)
ΔlnSALE 0.777*** 0.596*** 0.341*** 0.682***
(38.22) (11.92) (4.59) (8.65)
ΔlnSALE×CCEXPO -0.035* -0.150*** -0.227*** -0.198**
(-1.70) (-3.11) (-2.88) (-2.24)

Other Controls Included Included Included Included

Fixed effects Year, Industry Year, Industry Year, Industry Year, Industry
Observations 30,889 30,250 30,953 25,195
Adjusted R2 0.794 0.825 0.238 0.143

Panel B. Other Sensitivity Tests

Dep. Variable = ΔlnSGA ΔlnSGA ΔlnSGA ΔlnSGA
Alternative Climate Exposure Controlling for
Firm fixed
measures Industry×
effect
ENVRISK CPU ΔlnSALE
(1) (2) (3) (4)
ΔlnSALE 0.554*** 0.571*** 0.394*** 0.481***
(16.38) (15.77) (10.19) (12.61)
ΔlnSALE×CCEXPO -0.208*** -0.208***
(-5.44) (-5.11)
ΔlnSALE×ENVRISK -0.613*
(-1.78)
ΔlnSALE×CPU -0.045
(-1.54)

Other Controls Included Included Included Included

Industry× ΔlnSALE Not Included Not Included Included Not Included
Fixed effects Year, Industry Year, Industry Year, Industry Year, Firm
Observations 31,082 31,242 31,242 31,242
Adjusted R2 0.396 0.395 0.402 0.437
Notes: *, **, *** indicate significance at the 10 percent, 5 percent, and 1 percent levels, respectively (two-tailed).
Table 4 presents the results of sensitivity tests. Panel A shows the regression results of using alternative cost measures
as dependent variables of the Equation (1): the log change in operating costs in Column (1), the log change in the
number of employees in Column (2), the log change in R&D expense in Column (3), and the log change in inventory
in Column (4). Panel B shows the regression results of using alternative climate change exposure measures in Columns
(1) and (2), and using alternative model specifications in Columns (3) and (4). All continuous variables are winsorized
at the top and bottom one percentile. t-statistics based on standard errors clustered by firm are shown in parentheses.
Variable definitions are provided in the Appendix A.

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 TABLE 5. Topical / Sentimental Analysis
Dep. Variable = ΔlnSGA
Topical Analysis Sentimental Analysis
(1) (2)
ΔlnSALE 0.570*** 0.557***
(17.04) (16.63)
ΔlnSALE×CCOPP -0.402***
(-4.79)
ΔlnSALE×CCREG -1.364***
(-3.20)
ΔlnSALE×CCPHY -0.444
(-0.45)
ΔlnSALE×CCSENTI -0.190**
(-2.15)
ΔlnSALE×ASSETINT -0.041*** -0.040***
(-4.76) (-4.68)
ΔlnSALE×EMPINT 4.415*** 4.686***
(3.98) (4.23)
ΔlnSALE×SIZE 0.020*** 0.020***
(4.26) (4.14)
ΔlnSALE×UNCERTAINTY -0.193*** -0.199***
(-5.21) (-5.29)
ΔlnSALE×GDPGROWTH 0.857*** 0.994***
(3.08) (3.55)
CCOPP -0.010 0.001
(-0.93) (0.11)
CCREG 0.072
(1.24)
CCPHY -0.038
(-0.35)
CCSENTI -0.005
(-0.51)
ASSETINT 0.012*** 0.012***
(10.02) (10.05)
EMPINT 0.127 0.109
(1.07) (0.93)
SIZE -0.001** -0.001*
(-2.02) (-1.95)
UNCERTAINTY -0.018*** -0.018***
(-3.84) (-3.79)
GDPGROWTH -0.010 -0.021
(-0.26) (-0.56)

Fixed effects Year, Industry Year, Industry

Observations 31,242 31,242
Adjusted R2 0.397 0.395
Notes: *, **, *** indicate significance at the 10 percent, 5 percent, and 1 percent levels, respectively (two-tailed).
Table 5 presents the regression results of estimating the Equation (1) using detailed climate change exposure measures.
Column (1) shows the regression results of using topic measures: “opportunity”, “regulation”, and “physical shocks”

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related to climate change. Column (2) shows the regression results of using a sentiment measure which captures the
relative frequency of positive words compared to negative words. All continuous variables are winsorized at the top
and bottom one percentile. t-statistics based on standard errors clustered by firm are shown in parentheses. Variable
definitions are provided in the Appendix A.

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 TABLE 6. Cross-Sectional Tests (1): Positive Expectation about Future Demand
Dep. Variable = ΔlnSGA
Government Customer Managerial Ability Managerial Optimism
(GOVCUSTOMER) (MGTABILITY) (OPTIMISM)
Yes No High Low High Low
(1) (2) (3) (4) (5) (6)
ΔlnSALE 0.538*** 0.533*** 0.550*** 0.505*** 0.421*** 0.534***
(3.25) (12.07) (11.97) (9.97) (5.16) (5.99)
ΔlnSALE×CCEXPO -0.451*** -0.151*** -0.426*** -0.138** -0.371*** -0.166*
(-3.11) (-3.50) (-6.89) (-2.52) (-3.25) (-1.70)
ΔlnSALE×ASSETINT 0.009 -0.047*** -0.040*** -0.059*** -0.045* 0.007
(0.15) (-4.18) (-2.94) (-4.83) (-1.92) (0.31)
ΔlnSALE×EMPINT 8.328* 4.892*** 10.026*** 3.419** 9.026*** 8.210***
(1.68) (2.63) (5.70) (2.55) (4.19) (3.05)
ΔlnSALE×SIZE 0.015 0.024*** 0.018*** 0.033*** 0.035*** 0.008
(0.74) (3.76) (3.00) (4.43) (3.18) (0.69)
ΔlnSALE×UNCERTAINTY -0.428*** -0.237*** -0.102** -0.229*** -0.109 -0.103
(-2.72) (-5.02) (-2.23) (-4.25) (-1.23) (-0.86)
ΔlnSALE×GDPGROWTH 3.666* 0.770 1.261** 0.793 1.472* 1.041
(1.93) (1.46) (2.17) (1.57) (1.87) (1.11)
CCEXPO -0.006 0.002 0.004 0.009 0.011 -0.016
(-0.27) (0.29) (0.50) (1.32) (0.86) (-1.29)
ASSETINT 0.009 0.013*** 0.014*** 0.011*** 0.015*** 0.009***
(1.17) (7.09) (6.99) (6.27) (5.09) (3.00)
EMPINT -0.042 0.115 -0.101 0.129 -0.278 0.143
(-0.06) (0.67) (-0.54) (0.72) (-1.14) (0.44)
SIZE -0.001 -0.000 -0.001 -0.002*** -0.004*** -0.004***
(-0.26) (-0.21) (-1.05) (-2.64) (-4.47) (-3.38)
UNCERTAINTY -0.021 -0.021*** -0.022*** -0.030*** -0.003 0.027**
(-0.75) (-3.10) (-3.62) (-4.33) (-0.23) (1.97)
GDPGROWTH -0.619** -0.068 0.056 -0.110 -0.230*** -0.067
(-2.28) (-1.01) (0.91) (-1.55) (-2.71) (-0.66)

Test for difference

ΔlnSALE×CCEXPO -0.301** -0.288*** -0.205*
(p-value) (0.024) (0.000) (0.086)

Fixed effects Year, Ind Year, Ind Year, Ind Year, Ind Year, Ind Year, Ind
Observations 1,123 15,759 13,756 13,757 5,161 3,977
Adjusted R2 0.372 0.348 0.428 0.360 0.448 0.447
Notes: *, **, *** indicate significance at the 10 percent, 5 percent, and 1 percent levels, respectively (two-tailed).
Table 6 presents the regression results of estimating the Equation (1) depending on expectation about future demand.
Column (1) and (2), (3) and (4), and (5) and (6) compares the regression results depending on the existence of
government customers, the degree of managerial ability, and the degree of managerial optimism, respectively. All
continuous variables are winsorized at the top and bottom one percentile. t-statistics based on standard errors clustered
by firm are shown in parentheses. Variable definitions are provided in the Appendix A.

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 TABLE 7. Cross-Sectional Tests (2): Market Competition
Dep. Variable = ΔlnSGA
Market Competition Cosine Similarity Market Fluidity
(HHI) (SIMILARITY) (FLUIDITY)
High Low High Low High Low
(1) (2) (3) (4) (5) (6)
ΔlnSALE 0.624*** 0.549*** 0.586*** 0.542*** 0.565*** 0.600***
(12.17) (12.47) (12.02) (10.70) (11.83) (11.62)
ΔlnSALE×CCEXPO -0.135*** -0.336*** -0.353*** -0.217*** -0.305*** -0.213***
(-2.64) (-6.03) (-4.72) (-4.60) (-5.53) (-3.72)
ΔlnSALE×ASSETINT -0.055*** -0.043*** -0.048*** -0.030* -0.052*** -0.022
(-4.14) (-4.01) (-4.22) (-1.88) (-4.31) (-1.46)
ΔlnSALE×EMPINT 6.271*** 3.102* 5.789*** 2.586 7.240*** 2.375
(4.78) (1.69) (3.98) (1.61) (4.96) (1.44)
ΔlnSALE×SIZE 0.009 0.031*** 0.017** 0.024*** 0.017** 0.021***
(1.26) (5.14) (2.47) (3.48) (2.44) (3.06)
ΔlnSALE×UNCERTAINTY -0.278*** -0.151*** -0.167*** -0.162** -0.111** -0.340***
(-4.09) (-3.50) (-3.73) (-2.45) (-2.49) (-4.67)
ΔlnSALE×GDPGROWTH 1.525*** -0.011 0.889 1.283*** 1.068* 0.919*
(3.86) (-0.03) (1.51) (2.62) (1.89) (1.82)
CCEXPO -0.007 0.009 0.006 0.003 -0.003 0.004
(-1.01) (1.16) (0.58) (0.50) (-0.40) (0.52)
ASSETINT 0.012*** 0.013*** 0.014*** 0.008*** 0.012*** 0.012***
(5.32) (8.30) (8.55) (4.17) (6.79) (6.21)
EMPINT 0.224 0.073 0.103 0.033 0.024 0.046
(1.18) (0.47) (0.55) (0.22) (0.14) (0.26)
SIZE -0.001* -0.001 -0.001** -0.000 -0.000 -0.002***
(-1.75) (-1.35) (-2.27) (-0.78) (-0.52) (-2.99)
UNCERTAINTY -0.010 -0.021*** -0.033*** 0.000 -0.024*** -0.010
(-1.24) (-3.68) (-5.44) (0.03) (-3.99) (-1.19)
GDPGROWTH -0.039 0.055 -0.065 -0.006 -0.007 -0.070
(-0.74) (1.10) (-0.94) (-0.09) (-0.10) (-1.09)

Test for difference

ΔlnSALE×CCEXPO 0.201*** -0.136* -0.092
(p-value) (0.004) (0.061) (0.123)

Fixed effects Year, Ind Year, Ind Year, Ind Year, Ind Year, Ind Year, Ind
Observations 15,530 15,712 14,443 14,443 14,440 14,442
Adjusted R2 0.384 0.414 0.380 0.418 0.371 0.437
Notes: *, **, *** indicate significance at the 10 percent, 5 percent, and 1 percent levels, respectively (two-tailed).
Table 6 presents the regression results of estimating the Equation (1) depending on market competition. Column (1)
and (2), (3) and (4), and (5) and (6) compares the regression results depending on the Herfindahl-Hirschman index,
the degree of product similarity, and the degree of product market fluidity. All continuous variables are winsorized
at the top and bottom one percentile. t-statistics based on standard errors clustered by firm are shown in parentheses.
Variable definitions are provided in the Appendix A.

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 TABLE 8. Address Endogeneity Issues
Panel A. Instrument Variable (IV) Analysis
First Stage Second Stage
Dep. Variable = CCEXPO ΔlnSALE×CCEXPO ΔlnSGA
(1) (2) (3)
ΔlnSALE 0.059 0.042
(0.66) (1.51)
ΔlnSALE×CCEXPO -1.310**
(-2.27)
ΔlnSALE×CCEXPO_SUPPLIER 0.210 0.582***
(0.64) (3.94)
ΔlnSALE×ASSETINT -0.001 0.001 -0.002
(-0.11) (0.27) (-0.07)
ΔlnSALE×EMPINT 1.132 -1.535** 14.252***
(0.64) (-2.49) (2.94)
ΔlnSALE×SIZE -0.009 -0.001 0.020
(-0.93) (-0.18) (1.11)
ΔlnSALE×UNCERTAINTY -0.002 0.007 -0.019
(-0.03) (0.24) (-0.12)
ΔlnSALE×GDPGROWTH 0.197 -0.183 -0.239
(0.23) (-0.81) (-0.21)
CCEXPO_SUPPLIER 0.531*** 0.006
(5.39) (0.84)
CCEXPO 0.020
(0.28)
ASSETINT 0.001 -0.000 0.008**
(0.18) (-1.00) (2.07)
EMPINT -0.000 0.132*** -1.141
(-0.00) (2.71) (-1.55)
SIZE 0.002 -0.000 -0.006***
(0.97) (-0.03) (-3.24)
UNCERTAINTY 0.013 -0.000 0.037*
(0.90) (-0.19) (1.85)
GDPGROWTH -0.093 0.008 0.013
(-1.14) (0.57) (0.11)

Sanderson-Windmeijer F-statistic 28.71 15.60

Fixed effects Year, Industry Year, Industry Year, Industry
Observations 2,890 2,890 2,890
Adjusted R2 0.311 0.439 0.367

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Panel B. Matched Sample Analysis
Propensity Score Matched Sample Entropy Balanced
First Stage Second Stage Sample
Dep. Variable = CCEXPO_D ΔlnSGA ΔlnSGA
(1) (2) (3)
ΔlnSALE 0.300 0.540*** 0.570***
(1.16) (14.74) (16.06)
ΔlnSALE×CCEXPO_D -0.034** -0.065***
(-2.50) (-5.22)
ΔlnSALE×ASSETINT -0.098 -0.045*** -0.036***
(-1.59) (-4.87) (-3.98)
ΔlnSALE×EMPINT 17.863** 4.769*** 6.207***
(2.02) (3.99) (5.72)
ΔlnSALE×SIZE -0.033 0.029*** 0.021***
(-0.95) (5.59) (4.08)
ΔlnSALE×UNCERTAINTY -0.320 -0.206*** -0.199***
(-1.18) (-5.12) (-4.81)
ΔlnSALE×GDPGROWTH 3.552 1.065*** 0.994***
(1.29) (3.24) (3.36)
CCEXPO_D 0.004*** 0.003**
(2.68) (2.18)
ASSETINT -0.001 0.013*** 0.012***
(-0.04) (9.41) (9.17)
EMPINT -3.862** 0.104 0.068
(-2.21) (0.80) (0.57)
SIZE 0.094*** -0.001* -0.001**
(12.39) (-1.89) (-2.01)
UNCERTAINTY -0.004 -0.018*** -0.012**
(-0.08) (-3.66) (-2.43)
GDPGROWTH -1.821*** -0.007 -0.034
(-4.43) (-0.17) (-0.92)

Fixed effects Year, Industry Year, Industry Year, Industry

Observations 31,242 23,620 31,242
Adjusted R2 0.064 0.412 0.408
Notes: *, **, *** indicate significance at the 10 percent, 5 percent, and 1 percent levels, respectively (two-tailed).
Table 8 presents the results of robustness tests. Panel A shows the regression results of conducting an instrumental
variable analysis. Panel B shows the regression results of conducting a matched sample analysis. All continuous
variables are winsorized at the top and bottom one percentile. t-statistics based on standard errors clustered by firm
are shown in parentheses. Variable definitions are provided in the Appendix A.

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 TABLE 9. Supplementary Test: Firm Value Implication
Dep. Variable = TOBINQ(t+1) TOBINQ(t+2) TOBINQ(t+3)
(1) (2) (3)
CCEXPO 0.304** 0.277** 0.278**
(2.41) (2.13) (2.03)
SGARIGIDITY -0.061* -0.051 -0.036
(-1.96) (-1.52) (-1.05)
CCEXPO×SGARIGIDITY 0.474*** 0.451** 0.427**
(2.76) (2.49) (2.28)
LEVERAGE -0.003 0.009 0.017
(-0.27) (0.70) (1.27)
CASH 0.640*** 0.597*** 0.517***
(5.48) (4.70) (3.80)
ROA 1.668*** 1.505*** 1.250***
(12.04) (9.87) (7.65)
RD 3.313*** 2.857*** 2.476***
(14.13) (11.47) (9.47)
CAPEX 5.437*** 5.307*** 5.046***
(12.91) (11.48) (10.04)
TANGIBILITY 4.279*** 2.867*** 2.154***
(8.96) (5.80) (4.15)

Fixed effects Year, Industry Year, Industry Year, Industry

Observations 19,009 17,122 15,325
Adjusted R2 0.307 0.271 0.241
Notes: *, **, *** indicate significance at the 10 percent, 5 percent, and 1 percent levels, respectively (two-tailed).
Table 10 presents the results of testing the firm value implication of increasing cost rigidity in a response to climate
change exposure. Columns (1) to (3) shows the regression results of using as dependent variables Tobin’s Q of year
t+1 to t+3, respectively. All continuous variables are winsorized at the top and bottom one percentile. t-statistics based
on standard errors clustered by firm are shown in parentheses. Variable definitions are provided in the Appendix A.

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