The microeconomic effects of temperature changes
Introduction
According to the Fifth Assessment Report of the IPCC, the global average temperature has increased by nearly 1 °C since the 21st century, which has seriously affected the normal operation of productive activities such as the work of workers and the operation of machines (Tawatsupa et al., 2010; Zivin and Neidell, 2014; Cai et al., 2018; Zhang et al., 2018; Chen and Yang, 2019). Therefore, scholars have begun to pay extensive attention to the causal relationship between temperature changes and economic output (Hsiang, 2010; Dell et al., 2012; Zhang et al., 2018; Chen and Yang, 2019). Most research has found that higher temperatures have a significant negative (Hsiang, 2010; Dell et al., 2012), or inverted U-shaped (Burke et al., 2015), effect on the total economic output of a country or region. The above findings are also confirmed in the agricultural sector (Schlenker and Roberts, 2009; Deschênes and Greenstone, 2012; Marshall and Kyle, 2016). For instance, Chen et al. (2016) and Cui (2020) conducted studies on the relationship between temperature changes and agricultural yields in China and the United States, respectively, based on setting temperature bins. They found that yields of maize and soybean began to decrease when temperatures rose to 28 °C, and that extremely high temperatures above 34 °C accelerated the rate of yield decline.
Considering the important share of manufacturing industry in the national economy of many countries (Cai et al., 2018; Zhang et al., 2018), some scholars have started to explore the impact of temperature changes on the output of manufacturing enterprises at the micro-firm level in recent years, which has revealed the microeconomic effects of temperature changes to a certain extent. To be specific, Cachon et al. (2012) constructed a temperature bin using the number of days per week above 32 °C, and used data from 64 automotive companies in the United States over the period 1994–2005 to quantify that extremely hot temperature (>32 °C) for more than six days a week would reduce weekly vehicle production by approximately 8%. In fact, in addition to the extremely hot temperature that can affect the output of manufacturing companies, the impact of low temperature cannot be ignored. Zhang et al. (2018) used the data from Chinese manufacturing scale firms from 1998 to 2007 and found an inverted U-shaped relationship between temperature and corporate total factor productivity in a quantitative study by setting a temperature bin between −12 °C and 32 °C of 5.5 °C wide. Based on the above methods, Chen and Yang (2019) further controlled sunshine duration to mitigate endogeneity problems caused by the omission of other climatic factors in the model, and again confirmed a non-linear relationship between temperature changes and corporate output.
Our paper has different findings on the microeconomic effects of temperature changes. Specifically, firstly, much of the existing literature has focused on the results of the impact of temperature changes on the output of manufacturing companies, although some scholars have found significant heterogeneity of the impact of high temperatures on the output of capital-intensive and labor-intensive companies, revealing to some extent that the impact of high temperature on the output of companies is constrained by labor (Cai et al., 2018). The existing research failed to reveal how capital allocation changes in the face of temperature variations, and further did not quantitatively confirm the above theoretical mechanisms. Therefore, in this paper, we take a look at the factors of production, such as labor and capital, to explore the mechanisms inherent in the microeconomic effects of temperature changes.
Secondly, companies usually take adaptation actions such as welfare subsidies and installation of cooling equipment when faced with extremely hot temperatures (Cai et al., 2018). In fact, considering that state-owned enterprises are stronger in implementing adaptation actions compared to non-state-owned enterprises, existing studies found that temperature changes have a much smaller impact on the output of state-owned enterprises through the heterogeneity analysis, which only revealed the impact of adaptation actions on the estimated results indirectly (Cai et al., 2018). If the adaptation actions are not controlled in the econometric model, it may underestimate the negative impact of the microeconomics of temperature changes. Our paper then uses the cost of electricity and water and welfare as proxy variables for the measure of adaptation actions, and constructs a regression to test whether the implementation of adaptation actions by firms has an impact on the benchmark results.
Finally, some research has attempted to mitigate the endogeneity problem in econometric models by controlling other climatic factors like sunshine duration, as well as year and firm fixed effects. Research still neglected city-level factors that affect both temperature and microeconomic effects of temperature changes. For instance, the size of population, level of economic development, and intensity of environmental regulations would also cause a bias in the estimation results. More crucially, taking into account that variations in a company's output affect its CO2 emissions and thus affect local temperature changes (Ang, 2007), there may also be an inverse causal relationship on the microeconomics effects of temperature changes. Therefore, the endogeneity problem in the existing literature remains to be overcome. Based on this, our paper further mitigates the endogeneity problem in the econometric model by controlling the relevant variables at the city level. We also use the forest growth rate measured by the existing temperature-forest growth model as an instrumental variable for temperature with the Two-stage least square method.
Our results can inform the development of climate governance policies. In fact, we find that temperature changes have a negative effect on corporate financial performance. Although the existing literature suggests that implementing adaptation actions are effective in enhancing employee workforce productivity and reducing the negative effects of temperature changes, our study suggests that too many adaptation actions increase corporate adaptation costs and cause capital misallocation. State-owned enterprises, in particular, often have to pay more for adaptation costs and are more severely affected by temperature changes. Therefore, local governments should formulate corresponding adaptation policies and provide subsidies for enterprises to reduce the cost of adaptation and maintain the healthy development of local enterprises. However, since regional adaptation policies are often constrained by the financial situation of local governments, to mitigate the long-term impact of temperature changes on the corporate financial performance, the central government should adhere to the principle of green development, promote industrial restructuring, and develop a clean energy structure so as to reduce greenhouse gas emissions.
The rest of the paper is organized as follows. Section 2 presents the data and method. Section 3 describes the results and the discussion of the results. Section 4 presents the mechanism test and the heterogeneity analysis while Section 5 gives a conclusion and offers policy implications.
Section snippets
Dependent variable: corporate financial performance
In order to reveal the impact of temperature changes on the microeconomics effects, we refer to the existing literature to choose the corporate financial performance to measure the microeconomic effects (Chirinko, 1987). The prevalent methods of measuring corporate financial performance include single index method and index system method. Although the index system method combines multiple indexes in gauging corporate financial performance, this method often leads to heterogeneous measurement
Temperature variables measured as seasonal average temperatures
The results of the benchmark regressions with the seasonal average temperatures are presented in Table 2. On the basis of controlling the meteorological, firm-level and city-level factors, so do with the firm and year fixed effects in column 1, we tend to mitigate endogeneity problems caused by omitted variables. Meanwhile, we replace the firm fixed effects to city and industry fixed effects in column 2 to test the robustness of the results.
The coefficient estimate of Awtem in column 1 of Table
Mechanism test
Temperature changes usually affect economic performance by changing the allocation of factors of production such as labor or capital (Dietz et al., 2016; Dafermos et al., 2018). However, the existing literature is mostly concerned with how temperature variations affect the labor productivity of firms (Cai et al., 2018; Heyes and Saberian, 2019), which ignores the possible impact of changes in temperature on the firms’ capital allocation. Therefore, based on the labor productivity decline effect
Conclusion
In this paper, we use financial data from listed Chinese manufacturing companies, combined with meteorological data, to assess the microeconomic effects of temperature changes and explore the mechanisms. Our results show that high summer average temperatures significantly reduce the financial performance of manufacturing firms, while the average winter, spring, and autumn temperatures do not have a significant effect on the financial performance of firms. We further use temperature bins as
CRediT authorship contribution statement
Wenjian He: Conceptualization, Formal analysis, Writing – original draft, preparation, Writing – review & editing, Supervision, Funding acquisition. Yu Cheng: Data curation, Methodology, Formal analysis, Writing – original draft, preparation, Writing – review & editing. Hongxiao Zhang: Data curation, Formal analysis, Writing – review & editing. Fuqiang Guo: Data curation, Formal analysis, Writing – review & editing. Huimiao Yu: Conceptualization, Methodology, Visualization, Formal analysis.
Declaration of competing interest
The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.
Acknowledgements
This work was supported by National Natural Science Foundation of China [grant number 72003097]; Humanities and Social Sciences Research of Ministry of Education of China [grant number 18YJC790041]; Natural Science Foundation of Jiangsu Province [grant number BK20190775].
References (74)
CO2 emissions, energy consumption, and output in France
Energy Pol.
(2007)- et al.
Corporate governance and firm performance: the sequel
J. Corp. Finance
(2019) - et al.
The impact of temperature on manufacturing worker productivity: evidence from personnel data
J. Comp. Econ.
(2018) - et al.
Asymmetric effects of investor sentiment on industry stock returns: panel data evidence
Emerg. Mark. Rev.
(2013) - et al.
Impacts of climate change on agriculture: evidence from China
J. Environ. Econ. Manag.
(2016) - et al.
Evidence from China on the value relevance of operating income vs. below-the-line items
Int. J. Account.
(2004) - et al.
Temperature and industrial output: firm-level evidence from China
J. Environ. Econ. Manag.
(2019) Tobin Q and financial policy
J. Monetary Econ.
(1987)- et al.
Climate change, financial stability and monetary policy
Ecol. Econ.
(2018) - et al.
Balancing act: economic incentives, administrative restrictions, and urban land expansion in China
China Econ. Rev.
(2015)
The higher costs of doing business in China: minimum wages and firms' export behavior
J. Int. Econ.
Do Chinese government subsidies affect firm value? Accounting
Organiz. Soc.
Land financing and economic growth: evidence from Chinese counties
China Econ. Rev.
Temperature and mental health: evidence from the spectrum of mental health outcomes
J. Health Econ.
A comparison of value relevance of accounting information in different segments of the Chinese stock market
Int. J. Account.
Impact of ambient temperature on morbidity and mortality: an overview of reviews
Sci. Total Environ.
Acute impacts of extreme temperature exposure on emergency room admissions related to mental and behavior disorders in Toronto, Canada
J. Affect. Disord.
Health and climate change: policy responses to protect public health
Lancet
Temperature effects on mortality and household adaptation: evidence from China
J. Environ. Econ. Manag.
Temperature effects on productivity and factor reallocation: evidence from a half million Chinese manufacturing plants
J. Environ. Econ. Manag.
Robots and jobs: evidence from US labor markets
J. Polit. Econ.
Mostly Harmless Econometrics: an Empiricist's Companion
All that glitters: the effect of attention and news on the buying behavior of individual and institutional investors
Rev. Financ. Stud.
Relative valuation roles of equity book value and net income as a function of financial health
J. Account. Econ.
Cross-sectional model-building for research on subjective well-being: gaining clarity on control variables
Soc. Indicat. Res.
Global non-linear effect of temperature on economic production
Nature
Severe Weather and Automobile Assembly Productivity
Board connections and crisis performance: family, state, and political networks
J. Corp. Finance
The Visible Hand: the Managerial Revolution in American Business: Cambridge, Mass
The rise of robots in China
J. Econ. Perspect.
Changes in the value-relevance of earnings and book values over the past forty years
J. Account. Econ.
Beyond yield response: weather shocks and crop abandonment
J. Assoc. Environ. Resour. Econ.
Temperature shocks and economic growth: evidence from the last half century
Am. Econ. J. Macroecon.
The economic impacts of climate change: evidence from agricultural output and random fluctuations in weather: reply
Am. Econ. Rev.
Extreme weather events, mortality, and migration
Rev. Econ. Stat.
‘Climate value at risk’ of global financial assets
Nat. Clim. Change
Policy evolution and effect evaluation of new-energy vehicle industry in China
Resour. Pol.
Cited by (4)
Weather shocks and athlete performance: Evidence from the Chinese Soccer Super League
2024, Journal of Cleaner ProductionImpacts of climate change risks on financial performance of listed firms in agriculture industries in Vietnam
2023, Journal of Agribusiness in Developing and Emerging Economies