Firm-level Climate Change Exposure and Cost Structure

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